If you’ve been living in your home for some years and making regular mortgage payments, then you’ve probably built up some equity. Regular payments, an increase in property value, and proper upkeep are all important factors that raise your home’s equity.
A Home Equity Line of Credit (HELOC) is a revolving line of credit scored by placing your home equity as collateral. There are many benefits to a HELOC, and in this article we want to go over some of them, and share some other crucial information that you’ll need before you make up your mind on whether getting a HELOC is the right decision for you.
Advantages of a HELOC
There are several reasons why a HELOC may be suitable for you. Here are some of the key benefits:
Few restrictions on usage of funds
When you get a HELOC, you’re free to use the funds for travel, debt consolidation, education, or just about anything else. Just because the funds are obtained by using your home doesn’t mean you need to spend them on home improvements.
Pay a low APR
HELOC interest rates are generally low, and they’ve been especially low of late. This means that you have to pay less interest on the funds you take out, and you can use a HELOC for debt consolidation. The APR on credit cards can be around 16%, while a good HELOC will have an APR that’s 5% or below.
Borrow how much you need
Instead of having to borrow a lump sum like you would with a personal loan, when getting a HELOC you can take out the funds as you need them. So if you end up needing less money than you’d expected, that’s a win! This is part of why a HELOC is ideal for those who have the money to travel or study, but don’t know exactly how much they’ll be needing.
Flexible repayment terms
HELOCs are usually quite flexible when it comes to repayment. The timeline, for instance, can vary depending on the amount and the provider. Normally you only have to pay the interest during the draw period, but you can make principal payments as well, so you need to pay less during the repayment period.
Qualifying for a HELOC
Not everybody qualifies for a HELOC, so one of the first things you’ll want to do, once you realize this is an option you should look into, is find out if you qualify.
In Canada, you only need to qualify and get approval once. In order to qualify, you’ll need a minimum equity (or down payment) of 20%, or minimum 35% if you’re using a standalone HELOC as a mortgage substitute.
During the process, the lender will go through your credit score, income (provide proof of sufficient and stable income), and see whether you have an acceptable level of debt.
Next, you will need to pass a stress test – basically, you’ll need to prove you can afford to pay a higher interest rate than what’s actually stated in the contract. This test is mandatory even if you aren’t getting mortgage loan insurance.
Finally, you will need to provide proof that you own your house, mortgage details, and have an assessment done on your home’s value.
HELOC application process
If you qualify, getting the cash is pretty easy – you just have to go through nine steps, and if you’re efficient and know what to expect, the process should go without a hitch. Here’s the application process in a nutshell.
Step 1: Check your credit score
Step 2: Get your paperwork in order
Step 3: Apply for a HELOC. This process can be done online, with your mortgage agent, or bank.
Step 4: Verify your income
Step 5: Initial decision. Waiting, waiting, waiting!
Step 6: Appraisal
Step 7: Closing time. Just sign the documents, and you’re almost done!
Step 8: Review the documents
Step 9: Your HELOC is now ready to be used!
We’ll go over the first couple steps in detail below, so you understand the process better. Applying for credit can seem like a daunting task, but with clear, concise articles like these, we hope to make it a little easier for you.
Credit score calculation
The process of getting a HELOC starts with figuring out your credit score, and getting everything organized.
Your credit score depends on numerous factors, with the main ones being your payment history, the length of your credit history, used credit vs available credit, your public records, and the number of inquiries into your credit file.
Get your paperwork organized
The last thing you want is to have to hunt around for paperwork while you’re in the middle of the application process – especially if you’re in the bank for the application! So, to ensure things go smoothly, make a list of everything you’re going to need, and get it ready before you start. Different lenders have different requirements, but some common documentation includes income information, employment history, debt information, and mortgage information.
Debt consolidation with a HELOC
If you have several loans or credit cards, you can consider consolidating them into one HELOC. When you do that, not only do you make things simpler because you only have one payment to keep track of every month, but you also pay lower interest rates on your debts. This is because with a HELOC, you have one fixed interest rate payment (which is generally lower than the interest on a credit card).
Refinancing with a new lender
If you are unhappy with the terms of your current HELOC, you can get it refinanced. This does mean you’ll have to handle some extra paperwork, and it will make things a little more complicated. In addition, you may need to pay a penalty when you break your current mortgage – so think carefully before you make this decision.
Generally, if you want to refinance a HELOC, you can do it by opening a new HELOC, using a home equity loan (which is different from a HELOC), or by refinancing into a new first mortgage.