Home equity loan – HELOC

A home equity line of credit, or HELOC, allows you to borrow money using your home equity as collateral. HELOC’s are variable rate loans so be sure to familiarize yourself with a manageable rate.

Of all the lending products available in the market Home Equity Lines of Credit can be the most intricate and confusing.  In this case we will provide a summary to ensure simplicity and conciseness.

Home Equity Lines of Credit (HELOCs) Simplified

There are two main types of HELOCs: one combined with a mortgage and another as a stand-alone product.

1. HELOC Combined with a Mortgage:

  • Offered by major financial institutions, also known as a re-advanceable mortgage.
  • Combines a revolving HELOC with a fixed-term mortgage.
  • No fixed repayment amounts for the HELOC; interest is paid only on the amount used.
  • Credit limit can be up to 65% of the home’s purchase price or market value.
  • Allows financing part of the home purchase with HELOC and part with a fixed-term mortgage.
  • Sub-accounts can include personal loans, credit cards, car loans, and business loans.
  • Requires a minimum 20% down payment or equity.

Stand-alone HELOC:

  • A revolving credit product unrelated to the mortgage.
  • Maximum credit limit up to 65% of the home’s purchase price or market value.
  • Does not increase as mortgage principal is paid down.
  • Can be used as a substitute for a mortgage for flexibility.
  • Requires a higher minimum down payment or equity (at least 35%).
  • Offers flexibility in repayment with no prepayment penalty.

Home Equity Loans:

  • Different from HELOC; provides a lump sum payment up to 80% of the home’s value.
  • Repaid in fixed amounts on a fixed term and schedule.

Qualifying for a HELOC:

  • Requires a minimum down payment or equity of 20% or 35% for a stand-alone HELOC.
  • Factors include credit score, stable income, and manageable debt-to-income ratio.
  • Banks may apply a stress test for qualification, assessing the ability to afford payments at a higher interest rate.

Advantages and Disadvantages:

  • Advantages include easy access to credit, potentially lower interest rates, and flexibility.
  • Disadvantages involve the need for disciplined repayment, potential for overspending, and the risk of home possession in case of missed payments.

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