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Home Ownership, Mortgage Education, Mortgage Refinance

What is a HELOC Mortgage?

HELOC mortgageHELOC Mortgage: Briefly Defined

A home equity line of credit, or HELOC mortgage, is a type of loan and most Canadian banks deliver it on revolving credit. HELOCs allows new and seasoned homeowners to borrow up to 65% of a home’s current value minus your mortgage’s outstanding balance. This amount is known as home equity.

Home equity typically increases as you pay off your mortgage and your home value increases. You can get a HELOC on a fixed or variable rate. Some banks, such as TD, may allow you to combine your HELOC with your mortgage to borrow 80% of your home’s equity for a fixed term of time.

To qualify for a HELOC, your outstanding mortgage balance plus the HELOC typically and usually cannot exceed 80% of your home’s overall value.

Where and how can I access a HELOC Mortgage?

You can get a HELOC through the bank or credit union that’s financed your mortgage. Your lending institution will run some simple calculations to determine what your home equity is, how much you can borrow, and by extension, what interest rate you pay.

How do I calculate how much money I can borrow?

If you’re curious to know a rough estimate of current home equity, completing the following step-by-step calculations can give you an idea of how much you credit can borrow.

  1. Take your home’s current market value and multiply that value 80%. If you have a house worth $872,000, multiply that by 80% to get $697,600.
  2. Next, subtract the balance of your outstanding mortgage from the first calculation. In this case, let’s say you owe $540,000 on your mortgage. You would subtract $697,600 from $540,000. The resulting value is $157,600 (or 19% of your home’s value). This is how much your lender will potentially offer in a HELOC.
  3. To double-check our math, let’s divide our HELOC offer by the initial home market value. $157,600/$872,000 = 19%.

How do I pay off a HELOC?

As stated earlier, HELOCs are a type of revolving credit loan. This means that you won’t get the full amount that you’ve requested upfront, but you can use as little or much of it as you please, paying off your balance in the process. Your lender charges a small daily interest rate to any balance you borrow. You’ll make these interest-only payments on a month-to-month basis; your bank will normally automatically deduct this amount from your account on a set day each month.

What else should I know about a HELOC Mortgage?

Current Homeowners

HELOCs might seem like refinancing or second mortgages, but they’re not. You’re not required to break your current mortgage since a HELOC is essentially a special line of credit. You’re simply borrowing an amount of equity built on your home.

First-Time Buyers

If you’re a first time buyer and offered a 25% or 30% down payment deposit, that’s equity you’ve invested and established. You can apply for a HELOC at anytime, but may want to hold off doing so unless necessary. Remember that equity builds for how long you’ve owned your home.

Consider both variable and fixed rate options

Most Canadian lenders offer fixed and variable rate products at very low interest rates. Chat with a financial advisor at your financial institution a few days before applying for your HELOC. Taking a couple days to review your options can help rationalize what shouldn’t be a spur-of-the-moment decision.

Avoid borrowing more than you need

This tip might sound obvious, but tap into your equity only when you need it. According to an annual 2016 Mortgage Professionals Canada report, 24% of homeowners owed an average of $67,000 on their HELOCs. The average HELOC approved amount is $168,000 but most homeowners borrow far less.

Using your HELOC efficiently affords many benefits that a standard line of credit cannot. The key in successful use lies in careful use. Contact Mortgages.ca for help in deciding if a HELOC Mortgage is right for you.

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