A home equity line of credit (HELOC) is a revolving loan issued with your home as collateral. It works along the lines of a credit card, with a certain amount of money available for use at any point during a ‘drawing’ period. The sum of money made available directly depends on the debt free value of the collateral. It is a cost effective way to borrow money and your payments are tax deductible. This type of loan is available only to homeowners who have built up sufficient equity in their home. Default situations are rare as it could mean loss of property.

Here are few situations where you can benefit from a HELOC:

Home improvements

You should consider using your home equity line of credit to finance home improvements such as loft conversion, extension to the garden area or landscaping the garden, as these improvements increase your equity in your home by increasing its market value. Check with the local property experts for an estimate of how much your home’s market value will increase with the planned home improvements. Some home improvements like adding wooden flooring have no effect on the market value of the house. So it is advisable to consult a professional before you apply for the loan to ensure that your home equity increases because of the improvements.

Buying a Car

Using personal savings or taking a car loan are the traditional ways of financing a car purchase. But a home equity line of credit can be a good alternative to these conventional options. Factors such as the borrower’s credit history and the condition of the home will determine how good the loan offer will be. If you are considering this as a means to finance your car purchase, remember one thing – if you default on your car loan, you can lose your car, but if you default on a HELOC, you can lose your home. So make sure that you’ll be able to make the repayments regularly.

Debt Consolidation

Turning unsecured debts into a secured debt will lower the interest rate considerably. It is for this reason that a home equity line of credit is considered a good way to consolidate credit card debts. Credit card debts are unsecured debts at very high rates, resulting in much higher repayments. The advantage of debt consolidation is a single monthly payment that is lesser and consistent.

Besides the advantage of reduced interest rate, HELOC makes a bigger amount of money available as compared to a credit card. Making an expensive purchase is not only unadvisable on a credit card because of a high interest rate, but may even be impossible as the spend may be beyond your limit. This is unlikely to happen in a HELOC.

Never forget that default in a HELOC could mean potential foreclosure. You should have a professional look over your finances to check the feasibility of the loan and to make sure that you will be able to manage your home equity line of credit repayments.

Author Bio: For more information on second mortgages or equity loan Canada, contact Canadian Mortgages Inc.

Category: Finances
Keywords: home equity loan, mortgage loan, HELOC