Home equity line of credit: What you need to know

by Denis Doucet

What you’ll learn

  • The pros and cons of a home equity line of credit
  • What conditions you need to fulfill to obtain this financial solution 
  • The dangers of a home equity line of credit

A home equity line of credit is a mortgage product that can come in very handy, thanks in part by its low interest rate. It is also a go-to solution for people undergoing home renovations. Here is an overview of what any good home owner should consider when applying for a home equity line of credit.

The home equity line of credit : a useful financial product

Your mortgage broker and financial institution may recommend that you get a a home equity line of credit as it can be very useful, particularly if you need quick access to funds in the case of an emergency or if you want to renovate your home—all without having to sign a cheque or withdraw cash.

If a line of credit is already part of your mortgage contract, you don’t need to go back to the notary to activate it. All you have to do is make an appointment with your financial institution and you’ll be able to quickly access the funds for whatever reason. When you use a line of credit, you don’t need to have a proof of purchase or project. You can use the money to renovate your bathroom or go on a trip. A home equity line of credit is an open loan that you can reimburse, in part or fully, any time you want. All you have to do is make sure you pay the monthly interest fees.

The maximum amount you can get with a home equity line of credit is 65% of the total value of your home. To qualify, you need to prove that you have sufficient income and that your credit score is in check.

Advantages

The main advantage of a home equity line of credit is simple: the interest rate is very advantageous versus credit cards or personal loans. Compare the rates that are found on your monthly credit card statement—you’ll immediately see the difference!

The interest rates are only calculated on the amount you borrowed and the duration of your loan. This may sound obvious, but compared with a personal loan that you reimburse in monthly installments, it can make a huge difference on the amount of interest you pay.

For example, let’s say you want to install a new pool and you need $20 000. With a personal loan, you have to borrow $20 000—regardless of how much you actually spend at the end of the day. If the pool ends up costing $18 000, you’ll nevertheless pay the interest on the difference of $2000. With a line of credit, you can gradually pay back the loan when you can.

Disadvantages

Nothing is ever perfect. Here are aspects you need to consider when you opt for a home equity line of credit. First, the interest rates for lines of credit vary based on market fluctuations. If interest rates suddenly increase, you may find it hard to pay back what you owe.

Such easy access to this type of credit may incite some people to spend more than they should. Make sure you keep your spending at the same level as you normally would so that you can pay off the line of credit as soon as you can.

Key takeaways

 

  • A home equity line of credit offers easy and quick access to funds.
  • The interest rates of a home equity line of credit are much better than those of a credit card.
  • Interest rates may fluctuate depending on market conditions.
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