A home equity line of credit is a revolving loan that uses your home as collateral. Also known as a HELOC, it can be coupled with a mortgage or used for financing another home. It is similar to a credit card; HELOCs need to have its minimum payments amounts paid monthly.
New homeowners with a mortgage are usually offered a HELOC if they have enough down-payment for equity in their home. You can either get it at a bank or other financial institutions.
People get a HELOC for similar reasons why people get a cash-out refinance: weddings, car payments, investments, tuition, home renovations, medical expenses, TFSA/RRSP contributions, etc.
The great thing about a home equity LOC is that it's there when you need it.
The main advantage is the flexibility:
The main disadvantages are the fees and high requirements:
Because the amount of HELOC available is calculated from your home's value, you need to pay for home appraisal fees. Other fees may include: title search and insurance fees, and legal fees.
As mentioned above, people often get a cash-out refinance or home equity line of credit for similar reasons. HELOCs are used as you need it, whereas the money taken out of a refinance is used right away. You can learn more about refinancing here.
Cash out refinance:
Home equity line of credit:
Like other loans, a HELOC will require good credit, stable income and a reasonable amount of debt relative to that income:
Don't meet the requirements for a HELOC? You might be able to qualify for a second mortgage.
To calculate how much you qualify for with a HELOC: take the maximum LTV (loan to value), which is 80% of the the home value and subtract the remaining mortgage balance. It's important to check that the HELOC amount does not exceed 65% of the home's value.
For example, if the home is appraised at $350,000, the max LTV amount would be $350,000 x 80% = $280,000. Subtract the remaining mortgage balance: $280,000 - $175,000 = $105,000 to get the eligible HELOC amount. Now divide that by the home's value: $105,000 / $350,000 = 30%. Since the amount does not exceed 65% of the home's value, we're good!
You can also test out our light-weight calculator to see how much you could get:
Max LTV (loan-to-value) amount: $0.00
HELOC amount and home value ratio: 0.00%.
Under the 65% limit. All good!
You can get a HELOC of: $0.00
Of course, the above assumes your credit, income and debt ratios are good. Learn more about Breezeful or apply below to find out how much actual HELOC you qualify for. We check over 30 lenders to find the HELOC with the most competitive rate.
If you're looking for information about a pre-approval instead, click here.