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What is a HELOC?

What is a HELOC?

Posted on: March 15, 2013
Author: Staff

If you own your own home, have established some equity in that home (meaning your home's value is greater than the amount you owe on it), and you need to borrow some money for a big purchase or to pay down other debt, then a Home Equity Line of Credit (HELOC) may be a good option for you. This is because HELOCs generally feature lower interest rates than other forms of borrowing, like traditional lines of credit or personal loans.

The main reason banks offer HELOCs at lower interest rates is because they use your home's equity as collateral for your loan. In the unlikely event that you cannot make your payments, the bank can force the sale of your home to reclaim the borrowed money (foreclosure). This "back up plan" makes it less risky for the banks to lend you money, and so they can offer you a lower interest rate.

Other than the low interest rate, another benefit of a HELOC is that it is revolving. This means that if you use money from your HELOC and then repay that money, you can use that money again right away—you don't need to re-qualify for the loan. You can withdraw money from your HELOC or pay it off completely at any time, and other than the minimum interest payment, there are no set loan payments.

Your borrowing limit is based on how much equity you have in your home. New Canadian lending rules say that banks can lend up to 65% of the value of your home in a HELOC, minus any amount owing on your home. So if your home has been appraised at $400,000 and your mortgage balance is $200,000, then you could be approved for a maximum $120,000 HELOC:

Appraised value of property $400,000
Maximum conventional mortgage amount (80% of $400,000) $320,000
Less current outstanding mortgage amount $200,000
HELOC you may qualify for $120,000
HELOC you could qualify for if you didn't have a mortgage (65% of $400,000) $260,000

4 reasons you may want a HELOC:

  1. To pay for home renovations.

    It makes sense to use your home equity to increase the value of your home. Choose renovations that have a high return on investment, and you will get an even bigger payoff when you sell.

  2. To buy a second property.

    If a summer cabin, condo down south, or revenue property are on your wish list, a HELOC that's linked to your primary property may cover the cost or provide a hefty down payment. By using a HELOC, you might be able to avoid getting a second mortgage.

  3. To buy a new car or other big-ticket item.

    HELOCs typically feature lower borrowing rates than personal loans, so it's a popular option for Albertans who need to borrow money for a larger purchase.

  4. To invest.

    If the expected return on your investment is higher than your HELOC interest rate, you could use a HELOC to increase your portfolio—and still make a profit.

Why you may NOT want a HELOC:

Revolving lines of credit, like HELOCs, can be useful, but they can also be tough to pay down—simply because there is no set payment amount other than the minimum monthly interest payment. If you struggle with other forms of debt, or are concerned that you may use your HELOC for day-to-day purchases indefinitely, then you should sit down with an expert to create a long-term plan that will help you get on better financial footing.

"A HELOC is the most inexpensive, easily accessible form of borrowing for many Albertans—especially for people who have busy schedules and don't want to apply for a new loan each time they want to make a purchase or investment," says Brenda Kennedy, Branch Manager at the ATB Place branch in downtown Edmonton. "But it's important that people continue to build on the equity in their home by making more than the interest payments on the loan."

Brenda, or any of our other ATB experts, would be happy to sit down with you to discuss whether a HELOC is the right tool for you. Stop by your local branch or call 1-800-332-8383 to get started.

 
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