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What is a Home Equity Line of Credit?

Chances are that you consider your home your biggest, most valuable asset. One of the reasons that a home is considered an asset is due to the fact that you can borrow against the equity you have built up in your home. A home equity line of credit offers this opportunity.

A Quick Look at Equity

Equity is the amount of ownership you have built up in your home. When you buy a home with a mortgage, the bank essentially owns the home. You had to use the bank’s money to make the purchase, so if you miss payments, the bank can foreclose.

However, as you pay off the loan, you build ownership in it. Say you bought a home for $200,000. You put a 20 per cent down payment on the house, so you ended up borrowing $160,000. Over time, you have been making your payments, and you have paid off another $30,000, so that now you owe $130,000 on the home. If the home is still worth $200,000, you have $70,000 equity in the house.

If the home has appreciated in value, you have even more equity, since your equity is based on the value of your home. So, if the home has appreciated in value to $210,000, you actually have $80,000 equity. Your home equity line of credit taps into this ownership.

A home is considered an asset because you can borrow against the equity you have built up in your home. A home equity line of credit offers this opportunity.

How a Home Equity Line of Credit Works

A home equity line of credit is a type of loan against the equity in your home. Your home equity line of credit is a revolving account based on your equity. This means that you are given a limit, secured by your home’s value, and you can keep borrowing as long as you are below the limit. You have to make regular payments, and as long as you pay down your balance so that you still have room on your credit line, you can keep borrowing without applying for a new loan. I have a HELOC as part of my Scotiabank STEP mortgage, which I use to for the Smith Manoeuvre.

You also have to pay an interest rate. Often, though, the interest rate is relatively low, since the loan is secured by your home.

It’s a lot like having a credit card, only a credit card has higher interest and is unsecured.

It’s important to note that, even if you have $80,000 equity in your home, you might not be approved for a line of credit that large. Perhaps the bank will only approve you for $40,000 or $50,000. The amount you are approved for depends on your credit situation and other factors.

A HELOC is ideal for situations in which you think you will need access to cash, but you aren’t sure how much you will need, or when you will need it. This type of loan is all about flexibility. This makes home equity lines of credit ideal for home improvement projects. You can get the line of credit, and only get money when you actually need it.

You do need to be careful with a home equity line of credit, however. Since your home’s equity is collateral, there is a chance that your home could be foreclosed on if you aren’t careful. If you miss payments, your lender might try to recoup some of its losses by repossessing the house.

Before you open a home equity line of credit, it’s important to understand the situation, and make sure that you are careful not to borrow more than you can easily repay.

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