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A home equity line of credit is a revolving line of credit taken out against the equity in your home. Revolving means that it can be accessed at any time, and paid down at any time with no penalty. Because a HELOC is secured with your home's equity, the rates are much lower than standard lines of credit.
You can borrow from and pay down your line of credit at any time, so long as you don't go over your limit. Your credit limit will be decided by how much equity you have in your home – you must have more than 20% equity to get a HELOC.
The exact amount you can borrow is related to something called your loan-to-value ratio, or LTV. Your LTV is the amount you owe on your house vs. the value of the home if you were to sell today. For example, if you had a mortgage of $250,000 remaining on a home worth $500,000 in today's market, your LTV would be 50%. If you were to then take out a HELOC for $50,000 on that property, you would owe $300,000 and your LTV would be 60%.
The max LTV for a HELOC is 80%, so the total amount of all your loans on the property (including first mortgage, second mortgage, and HELOC) cannot be more than 80% of the value combined. On a $500,000 home, the max LTV of 80% means you can borrow up to $400,000.
A HELOC is a revolving loan, while a second mortgage is an instalment loan. A revolving loan can be used almost like a credit card (in fact, some HELOCs come with a card that lets you spend money from the line), while an instalment loan is more like a mortgage.
You have a limit that you can borrow up to at any time. When you first apply for a revolving product, your utilization is 0%. You can apply for a revolving product well before you intend to use or need it, and as long as the balance is $0 you don't payanything.
Whenever you need money, you take money from the line. Depending on your lender, there are a couple ways that you can access the money. Some come with cards that you can use like credit cards at retailers, but others only allow you to transfer funds online from the banking web portal. Either way, you'll start accruing interest only from the day you use it.
HELOCs are interest-only products. That means you're not required to repay the principal monthly, only the interest. Your monthly payments will be much lower than a loan that requires interest and principal payments, but there is no set schedule for repayment. If you never pay down the balance, you'll pay interest charges forever.
You can pay the full balance of you HELOC at any time with no penalty. The sooner you pay it off, the less you'll pay in interest over the life of the loan.
When you take out a home equity loan, you borrow a certain amount and promise to repay it over a set period of time. As soon as the financing is released, you're using 100% of the loan.
You get the full amount of the loan in a lump sum. It's up to you to spend it wisely. Many lenders will let you take out a home equity loan for literally any reason – just make sure it's a good one.
You have a set monthly payment with a home equity loan that you have to pay every month. Depending on your lender, you may have the ability to pay an additional amount on top of your monthly payment to repay it faster. However, paying it off in full may result in a penalty.
In order to get a HELOC, you'll have to get your home value appraised. The cost will vary depending on the type of appraisal required, and may be waived entirely by your lender.Additionally, you will have to pay a real estate lawyer to register the HELOC to your property. Here is a list of some common HELOC setup fees:
A home appraisal will tell the lender how much your home is worth. Since the amount you can borrow is directly tied to your equity, this is a crucial step in getting a HELOC.
Usual cost: $150 - $250
Registering the HELOC to your property requires a real estate lawyer.
Administration costs are what the bank charges you to setup a HELOC, not what the lawyer requires to register the property.
Usual cost: $150 - $200
A title search confirms that you are the rightful owner of a property. With identity theft on the rise in Canada, it's important that your lender verifies you own the property you're trying to add a loan to.
Usual cost: $250 -$500
Your lender may charge you inactivity fees if you don't borrow against your HELOC for a while.
Usual cost: varies by lender
Once you no longer need your HELOC, or you sell your property, you'll have to discharge the HELOC from your property. This is just like registering the HELOC, but in reverse.
Usual cost: $200 - $300