And why should you have one?
For guidance on this, I asked my friend Lino Contento, mortgage broker with Sherwood Mortgage Group.
HELOC stands for Home Equity Line of Credit, a secured line of credit against a home. It’s a convenient way to borrow money against what you’ve paid into your mortgage and usually comes with a lower rate of interest than a typical loan or personal line of credit. HELOCs are great if you need access to funds for renovations, to buy a car, or even to pay off credit cards that carry a higher interest rate. You can tap into your HELOC whenever you need it.
In order to set one up, you’ll need to complete an application (like a refinance) and qualify based on your income and your Total Debt Servicing (your ratio of earnings to all debt, including loans and credit cards). The maximum HELOC a person can have is 65% loan to value, so if your house is worth $1,000,000, the maximum equity line of credit you can have, based on government guidelines, is $650,000.00.
Some of the disadvantages are that your home is secured as collateral and your payments are interest only, so your principal balance remains the same. This can also be seen as a benefit, as you are only obligated to pay the interest until you wish to pay down the principal, and when you do, there is no penalty for paying back the full amount.
I know many people who have HELOCs and have used them over the years, even to secure part of a down payment for an investment property. It’s nice to have access to funds and the freedom to make principal payments when you can. Even if you don’t foresee a need for a HELOC, it’s a good idea to talk to your financial institution and set one up. It’s easier to secure the access to the funds when you don’t really need it.
If you have any questions, or would like an introduction to Lino, please send me an email and I’ll be happy to help.