A home equity line of credit or HELOC is a revolving credit secured by a home. It can be used to lower borrowing costs, or pay for tuition, or unexpected expenses. It can even help people invest 😎 If we’ve worked hard to build up equity in our homes then why not make that equity work for us? 😉
Benefits of having a HELOC.
Since it’s backed by a hard asset (our home) HELOC interest rates are lower than other types of loans like a traditional line of credit. This means if you have student loans, credit cards, or any other high interest debt, you can transfer the balance to a HELOC and save money on interest since most HELOC rates today are just 3.5%. They are also very accessible because we can get HELOC money via online banking, cheques, or even ATMs.
Applying for a HELOC.
I opened up a HELOC earlier this year. I just called my bank (CIBC) and asked to speak with someone to help me get a home equity line of credit. A representative went over the options with me like if I wanted to make “interest only payments” and if I wanted insurance coverage. I’ve always opted out of any insurance for loans but that’s just my personal preference. A couple weeks later, an appraiser called and made an appointment to come assess my home, which he did the next day and took about 10 minutes. He then gave his report to my bank. After that I met with a lawyer that my bank recommended and signed some legal documents.
About a week after that my HELOC was ready to go 😀
First, you must own a home. I think buying property is a great investment in general. Second you must meet the required 80% loan to value ratio. Take your home’s value and multiply it by 0.80, then subtract your current mortgage balance if you have one. If you are left with a positive number, then that’s how much credit is available for you to borrow. If it’s a negative number, it means you do not yet have enough equity to get a HELOC.
How does a HELOC work?
It works like any other revolving debt. The entire credit available is not given to us up front. Instead, the balance starts at $0 and we can use as much or a little of the HELOC as we want. Interest is calculated daily at a variable rate that fluctuates with Prime, which is currently at 3%. Interest only accrues if we actually borrow money from it. HELOCs are flexible because it allows us to decide how quickly we want to pay off the principle.
What does it cost to get a HELOC?
- Application fees: For paperwork and setting up the account. About $200. Ask to waive this fee because many banks will.
- Legal: To register the loan against our property. $500 to $1,000. We can use the bank’s lawyers for this or find our own.
- Appraisal: Banks need to properly assess the value of our home so they don’t lend us too much. About $200.
- Inactivity fees: There might be a fee if we don’t use our HELOC for a long time. Check with your bank about their dormant account policy.
- Account closure fees: Some banks have a discharge fee for the closing of HELOC accounts, about $200.