If you’re a homeowner, you’ve likely come across the term HELOC before. You may have even considered applying for one. But do you really know what the heck a HELOC is?
What is a HELOC?
To understand a HELOC also known as a Home Equity Line of Credit, it’s best to think of it as a hybrid between a credit card and a mortgage. Basically, a HELOC allows you to borrow money against the equity in your home (the difference between what your home is worth and what you owe) in the form of a line of credit.
How does it work?
HELOC’s provide a few benefits compared to a traditional loan. Unlike a loan, you don’t have to borrow money with a HELOC until you actually need it. HELOC’s also don’t include an amortization schedule and you don’t have a set payment schedule that you’ll need to follow.
Although many people have a mortgage and a HELOC, it’s not required to have both. If you don’t currently have a mortgage because you’ve paid it off (congratulations on that!), you can still apply and utilize a Home Equity Line of Credit if you need.
Home Equity Line of Credits vs. Home Equity Loans
One of the most important things to understand about a HELOC is that it is not the same as a Home Equity Loan. In comparison, a Home Equity Loan functions more like a second mortgage on your home. When you apply for and receive a home equity loan, you’ll receive a lump sum amount and will need to follow a payment schedule and an amortization schedule, just like a traditional mortgage. Home equity loans also typically involve a fixed interest rate, so your payments will remain consistent throughout the period in which you are repaying your loan.
As mentioned previously, HELOC’s are a little more flexible in terms of their repayment structure, the amount that you can borrow and they don’t include an amortization schedule. HELOC’s also typically involve a variable interest rate, which is something to be aware of. Keep in mind, that interest rates are predicted to rise in the near future and, if you do choose to go with a HELOC, your payments will likely increase.
So, Is A HELOC right for you?
The choice between a HELOC and a Home Equity Loan really depends on your own individual circumstances, financial goals and the type of flexibility you need with your loan. If you require a flexible loan and will be financially able to manage if your payments were to increase, a HELOC may be your best bet. If, however, you prefer the structure of a more traditional loan and would like to keep your loan payment amounts consistent, a HELOC may not be the way to go.
From home renovations to investing in a new property, there are many good reasons to consider some type of equity take-out, using your own savings to fund your new venture opposed to the banks. If you’re not sure which option works best in your case, call me and let’s chat. As an experienced mortgage broker in Barrie, I can help you determine the best way to make the equity in your home work for you. Contact me today at (705) 315-0516 to learn how I can help you make your next dream project a reality.