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Loan or home equity line of credit?

April 4 2017 by Multi-Prêts Hypothèques
What you'll learn
  • What is a home equity line of credit? 
  • Pros and cons
  • Beware excessive debt: discipline is a must!

Piggy bank and house

Some claim a home equity line of credit is practically a gift from the Gods. Others claim it’s a scheme that encourages excessive debt and financial ruin. But whom should you believe? 

The home equity line of credit : what is it?

A home equity line of credit gives you access to financing of up to 65% of your property’s market value. In return, you must put up your property as collateral. 

Once you get the line of credit, it is yours to use as you see fit. There are no restrictions as to what you can spend the money on. You can pay back only the interest, or the entire line of credit in one shot. There’s no deadline, no amortization, no penalty for early repayment. The line of credit is available as long as you keep your property. 

Pros

Just as you would with a traditional mortgage, you have to see a notary to obtain a line of credit, but you don’t need to go back to increase the amount if you’re looking to undertake renovations This could mean savings of up to $1,000. 

Another significant advantage is that the interest rate is usually better than that of a personal loan or line of credit. 

A home equity line of credit also allows you to consolidate your debts yourself by using it to pay back your credit card balances and other debts. You can even purchase a car with it, which can help you negotiate a discount or ask for more options.  

Furthermore, if you’re expecting to come into a significant amount of money, you can use it to repay your line of credit all at once with no penalties. 

Cons

A home equity line of credit requires a lot of discipline. As it places no constraints in terms of capital, nature of purchases or deadlines, which sees many use their property as an ATM and dig themselves into a bottomless pit of debt. Many bankruptcy trustees have spoken out against this behaviour. 

If you have a hard time limiting your credit card spending or tracking your personal finances, you’re better off with a traditional mortgage loan. Same goes for those who are uneasy with fluctuating economies and interest rates, since a home equity line of credit’s interest rate is variable. 

Also, if you only repay the interest over a long period of time, your line of credit will wind up costing you more than a mortgage loan, even if the interest rate is lower. It always pays off to pay down your mortgage as quickly as possible. 

Finally, it’s worth mentioning that a lender will grant you a loan more easily than a home equity line of credit. 

Key takeaways
  • With a home equity line of credit, you can access credit of up to 65% of your property’s market value. 
  • There’s no deadline, no amortization, no penalty for early repayment.
  • A line of credit offers a lot of advantages, but requires a lot of discipline to avoid excessive debt.
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