What is a home equity line of credit?
by Cooper Fitzpatrick Get your Financial Strategies Now
The home equity line of credit is part of the line of credit family.
A home equity line of credit is a loan in which the lender uses your property as collateral to make sure it will be repaid.
A home equity line of credit is often used to renovate a property or make large purchases. It is one of the popular mortgage refinancing solutions in Florida.
Would you like the advice of our mortgage refinancing broker partners?Get advice from our mortgage refinancing partners.
The home equity line of credit is revolving. This implies that you can borrow, repay, and re-borrow the funds up to the limit provided for in your loan agreement.
There are two types of home equity lines of credit as explained below.
Home equity line of credit combined with a mortgage
Home equity line of credit combined with a mortgage offered as part of a fixed-term mortgage. It is also very often distributed by several financial institutions under the name of home equity mortgage loan (or HELOC line of credit). This type of home equity line of credit can have different uses.
You can use it to buy a house, to pay off other debts with other financial institutions, or to collect other debts in one account. In fact, this type of home equity line of credit allows you to have several sub-accounts within the same credit limit: car loan, credit card or personal loan.
The Independent Home Equity Line of Credit
The independent home equity line of credit that is not backed by a mortgage.
How does a home equity line of credit work?
You can apply for a home equity line of credit at your usual banking institution. However, you will need to demonstrate your eligibility. But once your file is accepted, you can use your home equity line of credit as you see fit.
To qualify for a home equity line of credit, you will need to have a down payment or home equity of 20%.
In addition, you will need to prove that you are the owner of the property and provide your mortgage information to your bank advisor (balance, term, mortgage amortization). You will also need to authorize the lender to conduct an appraisal of your property. Finally, you will need to register your property as collateral with a notary.
In addition, financial institutions will give you a “stress test” in which you will have to prove that your financial conditions will allow you to repay your loan at an eligible interest rate higher than that of your mortgage loan agreement . However, credit unions and non-federally regulated lenders are not required to take this test.
The home equity line of credit interest rate is variable. To calculate the home equity line of credit rate, your financial institution must choose the higher rate between:
- the interest rate on ordinary Bank of Canada mortgages
- the interest rate negotiated between the financial institution and you, overweighted by 2%.
How do I pay off the home equity line of credit?
The advantage of a line of credit is that you only pay the interest on the amounts borrowed. There is no set amount that you generally have to repay on a line of credit.
The more you pay off your mortgage, the more gradually the amount of available credit will increase.
Created on Jun 23rd 2021 07:10. Viewed 135 times.