Purchasing a home is a major step regardless of the
size or stage in life you are currently at. After you’ve settled into your
investment and begun to chip away at your mortgage, you begin to feel a bit
house rich and cash poor. With all your capital tied up in your home, it can be
difficult purchasing other major investments when one already takes up a
substantial portion of your monthly pay cheque. Unlocking equity in your home
can allow you to access large sums of cash to invest in major purchases or
consolidate your debt into a manageable monthly payment.
Although there are a number of ways to unlock your
home’s equity (i.e., the value of your home minus the amount still owed on your
original mortgage), a home equity line of credit, or HELOC for short, is a
common option homeowners consider.
What Is a Home Equity Line of Credit?
Simply put, a home equity line of credit is a
low-interest loan taken against your home’s accumulated equity. The interest
rates on these loans are often much lower than traditional credit cards, and
you can gain access to a larger sum of cash compared to smaller personal loans.
What’s the Difference Between Fixed-Rate
Loan and Home Equity Line of Credit?
The primary difference between a fixed-rate loan and
a HELOC is the way your loan is distributed to you. A fixed-rate loan provides
you the option to access your loan in a lump sum and pay back the amount over a
period of time. A home equity line of credit is similar to a credit card, where
you have a set limit and your repayment schedule is based on the amount
borrowed. Depending on your financial situation and needs, one could be more
favourable than the other. Seek the advice of a financial advisor when
considering what terms to enter into.
Who Should Apply for a Home Equity Line of
The appeal of a HELOC is its flexibility. You can
continuously access your equity at the amount you require and pay interest
based on current market conditions. These rates are also considerably lower
compared to traditional credit cards since you are putting your house up as
collateral (i.e., lenders deem it more secure because of what is up for risk). A
HELOC is a good option for borrowers who know that from time to time they need
to access extra cash but don’t necessarily need a long-term loan, such as a
second mortgage or refinancing.
What Can a HELOC Be Used for?
A home equity line of credit can be used for just
about anything, but most homeowners consider this option when they want to
access cash for major investments. This could include home improvements or
upgrades, post-secondary education, funding a vacation, or consolidating their
Unlocking equity in your home can allow you to make
smart purchases and investments you otherwise wouldn’t have the capital for.
Always remember to budget your finances, speak with an expert, and consider all
the alternatives before making any major financial decisions.