A home equity line of credit or HELOC is a kind of loan that is based on your home’s value. It is a line of credit that is made available to you by the lender for a specified period of time. It is important to understand how these credit lines work before you sign up for them.

What is a HELOC?

A HELOC is a revolving line of credit that uses the home as collateral. The lender approves you for a specific loan amount and this forms the upper limit of the line of credit. This approved limit is based on the appraised value of your home less any dues you still owe on it, such as mortgages. The lender may also choose to offer a percentage of the home value, say 75% instead of the full value for the calculation of the maximum limit of the credit line.

This credit is available to you throughout a period that is determined at the time of establishment of the credit line.

Factors that affect the loan amount

The major factors affecting the loan amount are the market value of the property and any mortgages on it that are unpaid. There are also other factors that may affect the total loan amount that the lender is willing to offer. Your ability to repay the loan is studied in detail by the lender. Income level, debts other than mortgages and other expected recurring expenses will also have a bearing on the evaluation of your repayment capacity by the lender.

‘Draw’ and ‘repayment’ periods

Your HELOC may come with a specific ‘draw’ period and ‘repayment’ period. The draw period is when you are allowed to withdraw funds from the line of credit. This period is usually around 10 years during the initial part of the loan.

Once the draw period comes to a close, you can renew the credit line, if the terms of the loan allow this. Some credit lines come without a renewal option. When you are signing up for a home equity line of credit, this is one important point you need to confirm with the lender.

The draw period is followed by the repayment period during which you have to pay back the entire loan you have withdrawn. Some plans allow a fixed number of years to complete the repayment, but others require that you fully repay any outstanding amount in one lump sum at the end of the draw period.

Other limitations

Some home equity credit lines come with limitations and conditions on withdrawals. There may be a minimum withdrawal that you are required to make each time you need funds. Others may require that you make a withdrawal as soon as the line of credit is set up. Remember that every withdrawal that you make incurs interest. As interest rates on HELOCs are adjusted in line with prevailing rates, it is important for you to keep track of how rates are moving in the economy.

A home equity line of credit is a good way to use your investment in your home to arrange funding for large expenses. It is important to have a thorough understanding of how these loans work so that you can make the best use of them.

Author Bio: For more information on home equity line of credit or second mortgage in Canada, visit http://www.canadianmortgagesinc.ca/

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