What Is a Home Equity Line of Credit (HELOC)?Admin
Home Equity Line of Credit Mississauga
If you’ve been advised to refinance with a Home Equity Line of Credit (a.k.a. HELOC) instead of refinancing with a standard mortgage, then you may be wondering what the difference is between the two.
Therefore, we want to help you understand the characteristics, interest, APR, advantages, and risks associated with HELOCs.
Home Equity Line of Credit: The Characteristics
HELOC is a loan that is set up as a line of credit. It has a maximum draw, as opposed to a fixed amount.
For instance, a standard mortgage would be paid off entirely at closing, but with an HELOC, a lender will give you an advanced loan which you can pay back within a timeframe of your choosing.
A Home Equity Line of Credit enables you to write cheques or use a credit card to withdraw funds since you’d now have access to a line of credit.
While a majority of home equity line of credits are second mortgages, some are also first mortgages. If you choose a Home Equity Line of Credit for your first mortgage, this can save you a lot of money in the short-term, but it would also increase the risk.
Draw periods for HELOCs can range from 5 to 10 years, during which time a borrower must only pay interest. The repayment period is a bit longer, typically 10 to 20 years.
HELOC: The Interest
Since the balance of a home equity line can change from day-to-day, interest is usually calculated on a daily basis.
HELOC: The APR
APR on an HELOC holds a much different meaning than the APR on a standard loan. For a home equity line, APR refers to the interest rate only. The APR on a standard loan reflects points and upfront costs or fees. Therefore, on an HELOC lenders must show the interest rate twice, it’s a great way to protect borrowers too.
Home Equity Line of Credit: The Advantages
If you have needs that are intermittent such as home improvement projects, paying down credit card debt or paying for your child’s education, then selecting an HELOC is the right option to help you fund these needs.
At the time of drawing, some Home Equity Line of Credits can also be converted into a fixed-rate loan. It’s a great option if you’re a borrower who plans on drawing large amounts at one time.
HELOC: The Risks
One of the major risks with HELOC is that they are adjustable rate mortgages (ARMs), so there is a greater risk when it comes to interest rates. They are also riskier than a standard mortgage. Mortgage market changes can quickly impact an HELOC, with the exception of the guaranteed introductory rate.
Learn more about Home Equity Line of Credit Brampton from the team at Mortgage Alliance