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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
75 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 90% 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 $160,000 and you have $100,000 left on your mortgage.
The difference between your mortgage and 75% of your home's value, $120,000,
is $20,000. You should be able to obtain a line of credit of $20,000 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
half a 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.
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