One of the main reasons one chooses to buy a home is to build equity, not only so your money is going towards something that benefits you instead of a landlord, but also to secure your financial future in many different ways.
One of those benefits is being able to use your home's equity as cash in a time of need.
There are many different methods of using your home's equity, and one of those methods is a HELOC, or Home Equity Line of Credit.
How Much Would I Qualify For?
A HELOC is essentially a revolving line of credit, calculated based on your home's current market value versus how much you owe on your mortgage. Note that the current market value of your home is not necessarily the original cost of your custom home.
Most lenders will not refinance your mortgage if you owe more than 80% of your home's current market value, thus, this is the basis on which the calculation is made to determine how much credit you qualify for.
As an example, if your home's current market value is $950,000, multiply that value by 80% to yield the maximum amount your lender may finance you for. In this case, that would be $760,000.
Next, subtract how much you currently owe on your mortgage to render the amount your lender will potentially offer you in a HELOC. If you currently owe $600,000 on your mortgage, subtracting that from the maximum allowable to be financed at $760,000, you are left with a potential HELOC amount of $160,000.
Of course, this depends on your current credit score and debt ratio; your lender is not obligated to offer you this full amount and may put a limit on how much you have access to.
How Do I Pay Back a HELOC?
How Do I Pay Back a HELOC? As this type of loan is a line of credit, it revolves and can be reused as opposed to a credit loan in which you have one balance to pay off, and you cannot use it again to purchase something different. With a HELOC, you have an open balance similar to a credit card but with a much lower interest rate, and the line of credit is secured against your home.
Your lender will charge you a daily interest rate against any balance you owe. Depending on the terms of the line of credit, you'll make interest-only payments on a monthly basis, often automatically withdrawn from your account on a set day each month. Beyond this, you can choose how much additional payment you make on the principal balance of the loan, and these payments can be made at any time.
Terms of Repayment
The terms of repayment may vary depending on your credit situation and the risk your lender is willing to take. A HELOC normally has a 25-year term, similar to your mortgage, with a draw period and a repayment period.
The draw period is usually between five and ten years, during which time the homeowner is able to borrow as much as they'd like within their limit and make interest-only payments on the amount drawn.
The repayment period follows the draw period and lasts the duration of the amortization of the loan. At this time, payments must cover principal and interest in order to pay off the amount borrowed.
When Should I Get a HELOC?
Since this type of credit is borrowed against the equity in your home, it's best to use it only if you absolutely need to. If, for some reason, you're unable to pay back your line of credit, since it is secured against your home, your lender may put a lien on the home.
This means when you sell your home, your lender is paid back from the proceeds of your home prior to you receiving the funds from the lawyer. And because a HELOC is generally a larger amount of credit than a regular loan or credit card, it's easier to fall into financial trouble with this type of credit.
A HELOC can be a great credit solution to use when you need to upgrade your home, finish landscaping, or simply use when you have an unexpected financial need. If you're careful about how you use it, and how much you use, it can be a highly beneficial avenue of credit with a great amount of flexibility to suit your needs.
Speak to your favourite lender about how you can benefit from using a Home Equity Line of Credit.
