The Home Equity Line of Credit

If you have built up equity in your home beyond your original down payment, you may be able to use it to obtain cheap and flexible financing. Through our selection of lenders we can obtain a Secured Line of Credit up to 80 per cent of the appraised value of your home. This is one of the least expensive sources of financing available. Keep in mind we can also access lines of credit up to 85% on the value of your home as a 2nd mortgage.

How Do They Work?

A homeowners' line of credit is a cross between a personal line of credit and a second mortgage. You use your home as collateral for the loan. You do not have to draw the money until you need it. You can draw all or part of it at any time, and pay some or all of it back as you wish. Think of it as low-cost revolving credit.

How Much Can I Get?

A home equity loan is set up similar to a conventional mortgage. Lenders set a limit, usually from two-thirds to three-quarters of your home's value. This limit includes whatever mortgage remains on your house. Say your home is worth $200,000 and you have $100,000 left on your mortgage. The difference between your mortgage and 80% of your home's value, $160,000, is $60,000. You should be able to obtain a line of credit of $60,000 providing you meet the lender's requirements.

Interest Costs?

The interest rate on home equity lines of credit usually floats at a fixed amount at or over the prime rate. A typical rate would be at prime plus one percentage point (or as low as prime). Lenders usually want monthly interest payments as well as some payment toward principal. Remember, too, that lines of credit are demand loans, so your lender can demand repayment in full at any time... but likely won't.

Are There Fees?

Fees for setting up this type of credit line are about the same as for a mortgage. You will have to pay appraisal fees and legal fees, disbursements, and GST. We can often scout out the lowest set up fee option or special promotions where the lender will absorb these costs.

How Can I Use My Home Equity Line of Credit?

A home equity line of credit is ideal for someone who wants to take advantage of investment opportunities, perhaps in the stock market. Unlike interest on your mortgage, interest on funds borrowed for investment is deductible against income earned. A home equity line of credit is also useful for home renovation projects, and other undertakings where irregular bills have to be paid. The advantage of this kind of borrowing over a regular loan is that you don't have to take a large lump sum. You only draw the amount you need, when you need it. That means that you don't ring up interest costs if you're not putting the money to use.

A Word of Warning

Just because you can get a home equity line of credit doesn't mean you should. If you have a hard time spending within your means and often carry a big balance on your credit cards, you might want to avoid further temptation. There's nothing to stop you from using your entire line of credit on new clothes and restaurant meals. After your spending spree is over, you have to pay back what you borrowed. Think of it as having added several thousands of dollars to your mortgage, with little to show for it.

A Useful Financial Resource

On the other hand, if you are disciplined about your spending, a home equity line of credit can be an excellent financial resource. This is particularly true if, in order to keep administrative fees to a minimum, you can set one up at the same time you are arranging your mortgage. For example, a line of credit can serve as a great, and, until you have to use it, cost-free source of emergency cash. This allows you to reduce the emergency fund you should otherwise maintain. You can then redirect those dollars into investments that may be less liquid, but that offer higher returns.