Using the equity you have built up in your home is a good way to gain access to a large sum of money for critical expenses. There are different ways in which you can use the equity in your home. A home equity line of credit (HELOC) is one such tool that can be used to meet unavoidable expenses. Many people assume that a HELOC is just another home equity loan. But there are some significant differences that you need to understand so that you make a judicious decision about whether you should take one when you need funds.

What is a HELOC?

As the name suggests, a HELOC or a home equity line of credit is credit facility extended to you that you can draw on at any point through its term. Your bank may be willing to extend to you a line of credit based on your home. Usually, the upper limit to the credit line is calculated based on the actual market value of the property less any dues that you still have to pay on the home, such as mortgages. This is the equity you have in the home.

How does it work?

The funds can be withdrawn as and when you have a financial need. Until then you can simply avoid incurring the debt, and consequently avoid paying for it too. HELOC makes money available to you whenever you need it throughout the term of the credit line.

Advantages

Most people use this kind of loan to arrange for recurring expenses that may arise in future. Large expenses like college education, medical treatment, renovations etc can also be met with these loans because it may be much more expensive to raise funds from other sources.

Also, raising the loan from other sources may be a time consuming affair and such delays at the time when the expense arises can cause problems. A HELOC guarantees that money is available as soon as the need arises.

Disadvantages

The most common misconception about a HELOC is that the borrower incurs no expense at all until he actually draws from the line of credit. However, there are charges that apply every month on the line of credit even if you do not make any withdrawals. For example, you may have to pay maintenance charges for keeping your line of credit active. There may also be an annual membership fee in place. Most line of credit providers also charge a transaction fee that applies each time you make a withdrawal.

In addition to these, the cost of establishing the home equity line of credit may also be high. All these costs need to be factored into the total cost of the credit line when comparing it with other kinds of loans.

A home equity line of credit is a great tool to arrange funding for critical future expenses by using the equity in your home. But before you sign up for one, make sure that you understand the advantages and disadvantages of this option.

Author Bio: For more information on Canadian mortgages or a second mortgage, contact Canadian Mortgages Inc.

Category: Real Estate
Keywords: home equity loans, heloc, real estate, mortgage, finance