What is a HELOC?

What is a HELOC?

When it comes to types of mortgages, there is quite a bit of work to do to inform yourself about all the options available. It is important you know all of them to determine which one would best fit your needs. We have been writing about these for a while – check other blog posts – and today we will present the HELOC option. 

What is a HELOC then?

A HELOC is an acronym for Home Equity Line of Credit (check previous post on equity and equity loans).  This line of credit is used in conjunction with a mortgage, but can also be used as a mortgage on its own for up to 65% of the property’s assessed value. The lender uses your home as a guarantee that you will pay back the money you borrow.

Home equity lines of credit are revolving credit. You can borrow money, pay it back, and borrow it again, up to a maximum credit limit. One of the benefits of having this line of credit is not having a fixed repayment amount as your lender will generally only require you to pay interest on the money you use. The fixed term mortgage will have an amortization period. You have to make regular payments on the mortgage principal and interest based on a schedule. The amount of credit available in the home equity line of credit will go up to that credit limit as you pay down the principal on your mortgage. 

However, make sure you understand this well: normally, you are only required to make interest payments each month on the loan, so when a HELOC is the first and only mortgage against your home, there is a risk that the loan may never actually be paid off. However, there are some option here too: some products available can be divided into different types of loans that will require both principle and interest payments.

In summary, with a HELOC you have the choice of paying as much of the loan as you want or making interest-only payment. Do not forget that the interest is tied to the prime rate and can change at any time. 

Do you have questions about HELOC’s! We can answer them!