We’ve all been faced with a major expense at some point in our life. Perhaps the furnace has failed in the middle of December, or your car has unexpectedly quit in the middle of a busy work week. You need a large sum of money fast, but your options are slim. Maybe your income stream varies from month to month, or your bank account just isn’t big enough. In a situation like this, you need to act fast, but you don’t want to make a decision that could hurt your credit score for years to come. So, what’s a frantic homeowner to do? How about tapping into your unused home equity to quickly and easily cover your costs?
What is a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a great solution for homeowners who are in need of a flexible borrowing solution. This type of financing uses the home’s equity as collateral.
How a HELOC Compares to Other Financing Options
A home equity line of credit is a great borrowing option because it provides homeowners with a flexible solution without high interest rates – a common side effect of unsecured debt products. Let’s take a closer look at how a HELOC compares to some other common financing options:
Home Equity Line of Credit vs. A Traditional Mortgage
Unlike a mortgage, which is set up for a specific dollar amount, a HELOC is set up as a line of credit with a maximum draw amount. With a standard mortgage, for example, you might borrow $150,000, which would be paid out in its entirety. With a HELOC, your lender promises to provide you with up to $150,000 in any amount at the time of your choosing. You simply draw from the line by writing a cheque or using a special bank issued card.
Unlike a traditional mortgage, a credit line gives you the flexibility to borrow and repay as frequently as need be. A home equity line of credit gives you a pool of credit to work with instead of a finite sum. This can be very beneficial when working on projects that are known of unexpected expenses.
HELOC vs. Credit Cards
Many homeowners are tempted to use credit cards as a way to bridge larger financial gaps. While convenient, this type of credit line is very insecure and could cost you a boatload in unnecessary interest.
A home equity line of credit offers a significantly lower interest rate than credit cards. So, instead of tying yourself to high interest debt, you can lower your risk with a lower interest credit line. Remember, with a home equity line of credit you are only charged interest payments on what you have borrowed, and you can access more money if needed.
Most HELOCs are second mortgages; however, this isn’t a hard and fast rules. More and more home owners are turning to HELOCs for first mortgages. Talk with a Canadian mortgage broker for more information on the advantages and disadvantages of a first mortgage home equity line of credit.
A home equity line of credit can help you finance major investments, consolidate debt, and reduce the cost of borrowing. For more information on home to tap into your home’s equity, consult with a FamilyLending.ca mortgage broker today!