Home equity is the current market value of your home minus the remaining balance of your mortgage. Essentially, it’s the amount of ownership of a property you have built up through both appreciation as well as reductions in the mortgage principle made through your mortgage payments. So, as you pay off your mortgage and build equity in your home, a HELOC gives you the ability to reborrow a portion of these funds. You can use HELOC funds at your discretion for renovations, debt consolidation, higher education or anything else you need.
Just remember that the HELOC is secured by your home and cannot exceed 65% of your home’s value.
With a HELOC mortgage, the entire line of credit available is not advanced upfront. Rather, you have the freedom to use as much or as little of the HELOC as you choose, and you only pay interest on the amount you have withdrawn. Interest is calculated daily at a variable rate attached to Prime, however, HELOC rates are often higher than variable mortgage rates and the relationship to Prime can technically change anytime at the disrection of your lender. For example, a variable mortgage rate is often Prime +/- a number, like Prime – 0.35%. HELOC rates, however, are set at Prime + a number and your lender can technically change that number anytime.
Today’s HELOC Rates
< $50 000.00
- Current prime rate is 3.95%
>$50 000.00
- Current prime rate is 3.95%
Calculating a Home Equity Line of Credit
As per the Office of the Superintendent of Financial Institutions (OSFI), a HELOC can give you access to no more than 65% of the value of your home. It’s also important to remember that your mortgage loan balance + your HELOC cannot equal more than 80% of your home’s value. To see how this works, let’s look at an example:
Case Study
Let’s take for example, that the current value of your home is $700,000 and Mortgage balance is 350,000
Step 1 : Calculate maximum Loan-to-Value
To determine how much equity is at your disposal, start by taking your home’s current market value and multiplying it by 80%.
Step 2 : Calculate total allowable HELOC amount
Next, subtract the balance of your mortgage. The remaining figure is how much you can access through a HELOC
Therefore the maximum amount of equity you could pull from your home through a HELOC is $210,000.
Step 3 : make sure that HELOC amount does not exceed 65% limit
Now, you still need to make sure that $210,000 doesn’t exceed 65% of your home’s value. To be sure, simply divide the HELOC amount by the value of your home:
In this example, you could access $105,000 through a HELOC, which only amounts to 30% of your home’s value.
Your HELOC funds will be available through a revolving line of credit
With a home equity line of credit, the entire credit available is not advanced upfront. Instead, you can use as much or as little of the HELOC as you choose, and you only pay interest on the amount you withdraw. Interest is calculated daily at a variable rate attached to Prime. HELOC rates are traditionally higher than a variable mortgage rate but, unlike a variable mortgage rate, its relationship to Prime does not always stay the same. For example, a variable mortgage rate is often Prime +/- a number, like Prime – 0.35%. HELOC rates are set at Prime + a number, and your lender can technically change that number anytime.
You make interest-only payments
If you are using any portion of your home equity line of credit, you will need to make a monthly payment for doing so. The same way a traditional line of credit works, you will only need to pay the interest on your outstanding balance and that amount is automatically taken out of your bank account on the same day each month. To pay off the balance in full, you will need to be more disciplined and make extra payments at your own discretion. And remember: unlike a refinance, you do not need to break your existing mortgage when considering a HELOC. Therefore, you won’t need to pay a mortgage penalty – just a monthly interest-only payment.
