HOME EQUITY LINE

A home equity line of credit (HELOC) is a revolving line of credit that allows you to borrow the equity in your home at a much lower interest rate than a traditional line of credit.

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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the freedom to use as much or as little of the HELOC as you choose, and you only pay interest on the amount you have withdrawn.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

Prime + 1,0%monthly
  • Current prime rate is 3.95%

>$50 000.00

Prime + 0,5%monthly
  • 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

$0
Home Value
$0
Mortgage Balance

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%.

$0
House Value
0
Max LTV
$0
Max LTV Amount

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

$0
Max LTV Amount
$0
Mortgage Balance
$0
Allowable 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:

$0
Allowable HELOC
$0
Home Value
0
HELOC

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.

HELOC Features

The minimum amount of a HELOC varies from bank-to-bank, with some institutions not offering the product at all. The maximum HELOC amount is calculated as 65% loan-to-value of your home, as seen in the example calculation above.

HELOCs are described as having a revolving balance, because borrowing multiple times within the account for any amount up to the allowable credit limit does not require writing a new loan document. The credit limit can also be increased as the equity in your home grows.

It is sometimes possible to divide up your HELOC into smaller portions through different sub-accounts. An example of where this may be used is if you wanted to draw out equity to invest in the stock market. In this case, the interest you pay on borrowed money is tax deductible. So having a separate account makes it easier to track the money.

You can sometimes convert a portion of your outstanding borrowed HELOC funds to a fixed rate, which you will then pay like a standard mortgage.

This means that you can hold your mortgage with one bank and get a HELOC with another bank. A HELOC is not necessarily a “second mortgage”. A “first” or “second” mortgage is used to refer to the loan’s claim position. A HELOC is often second position because there is another mortgage on the property at the time. However, it is possible to have a HELOC in first position. HELOCs usually have higher interest rates because it is assumed that they will be in second position and, as a result, are riskier to the lender. In the case of you defaulting, the lender in second position is not repaid until the first position lender is.