When planning for your next financial move – a winter investment, or a reorganization of your outstanding debts, or some other use, there may be one resource sitting right under your feet, which you may not have considered yet: Your own home.

The opportunity is known as a HELOC – a Home Equity Line Of Credit – and it can represent an excellent source of funds for homeowners in Ontario, to access the money currently tied up in the value of their home.  

Let’s take a look at this well-established method of accessing money homeowners have in this province – and indeed across Canada – by applying for a HELOC for needed funds.  We’ll discuss what a HELOC is, what it might be used for, how to apply for one, and much more.  Read on.

Home Equity Line of Credit (HELOC) – What it Is

As a homeowner, you may be in the advantageous position of being able to access the equity you have in your home, in the form of a home equity line of credit, using the home itself as collateral.  Banks and other lending institutions issue this type of credit regularly to qualified homeowners.  

Despite the fact that you still have a mortgage on your house, townhouse, or condo, chances are you have a considerable amount of equity built up in it.  Particularly if you have been faithfully making your mortgage payments over a period of time, you have the ability to access a good part of what your dwelling is worth.  The equity you’ve built up, plus any increase in your home’s resale value over time, is basically money sitting there, at your disposal.  Major banks and other lending institutions, such as trusts, credit unions, and mortgage companies recognize this value, and they offer a vehicle for homeowners to access that money, in the form of a HELOC. 

There are two common types of HELOC:

HELOC combined with mortgage – you make your standard mortgage payments as usual, plus payments on the line of credit.  In this arrangement, the mortgage portion is a fixed term with a regular payment schedule.  The line of credit, on the other hand, has no fixed repayment amounts, although you are responsible for payment of all interest charges.

Stand alone HELOC – this line of credit is still guaranteed by your home, but it remains unrelated to your mortgage. As a result, you are limited to how much you can borrow, even if you pay down a significant part of your mortgage.

Reasons You Might Want to Apply for a HELOC

Taking advantage of the equity you have built up in your home when you apply for a HELOC can be put toward a number of actions on your part.  High among them is for investing in more real estate.  Lately, we’ve witnessed some easing in the real estate markets in Ontario and across Canada.  One excellent avenue for you as a homeowner is to seek out winter investment opportunities in the current market, by accessing funds through your HELOC.  

Other reasons may be to execute some renovations for your residence – perhaps to create a rental unit in the basement, or to construct an addition for rental purposes – excellent income generators.  This would also represent a good investment opportunity in the form of not only future rental income, but also increased resale value of your home.

Another use for a HELOC may be to consolidate debt – for example, other outstanding loans you may have, or accumulated credit card debt.  Clearing out such debt can be done less expensively through a HELOC, where it is all lumped together as one sum; It’s still a debt, but it’s also easier to manage from a single source versus various creditors, and their regular bills and statements.  The interest rates charged on a home equity line of credit will typically be much lower than most of your other loan types, credit cards especially.

Using Your HELOC for Investments

It’s important to recognize, we’ve already mentioned, that the equity in your home can be put toward investments, such as a down payment on a new property, or a renovation project for your home.  There may also be other investment opportunities you have identified, which require money up front; your HELOC could be used for such investments as well.  Keep in mind, though, that when you apply for a HELOC, and when you are approved and get one, you are adding to your existing debt.  The new money you’ve accessed through the equity in your home, you now also owe back.  

The Risks Associated with Any Type of Investing

Investing using your HELOC is no different than investing any other way – there is a certain amount of risk involved.  You should recognize this fact and be prepared for the risk associated with your actions.  For example, interest rates can change – in the worst case, they can rise dramatically.  If you have borrowed against the value of your home equity to make an investment using a HELOC, and then interest rates rise, you will suddenly be paying more for that borrowed money.  Whatever investment you make, as another example, could decline.  Again, that could put a strain on you financially.  Keep all this in mind as you consider your investing strategy.

Advantages of a Home Equity Line of Credit (HELOC)

There are some good reasons to apply for a HELOC as a means of accessing money, which in fact, you’ve worked hard to build up through your mortgage payments.  These include:

Access to credit that is simple.  Rather than starting from scratch, you are working with your existing lender to set the deal up; all your information is already on file, you are acquainted with your provider, and they are with you.  Although you still have to go through the typical application procedure, it should be relatively straightforward to go through the process.

Interest rates can be significantly lower than from other sources.  Specifically, unsecured loans or credit cards come with much higher repayment costs, in the form of interest charges. 

The ability to pay back borrowed money on your line of credit any time.  This is not always the case with other types of loans, which require the payment of an early payment or prepayment penalty.  This is not the case with a typical HELOC.

The ability to consolidate debts.  We mentioned above about this opportunity: Many individuals take out a HELOC in order to get their various debts into order, using the new borrowed money to pay off credit card balances and any other outstanding debts and loans.  This allows for the debt, which of course still exists, to be lumped into one sum, and paid back at a generally much lower rate than other types of loans.  A HELOC is a way to get out of financial hot water for some homeowners who find themselves saddled with debt from various sources.

How to Apply for a Home Equity Line of Credit

The process of applying for a HELOC is quite similar to what you would need to do to apply for any type of loan through a bank, trust, credit union or financial lenders.  The main difference is that you will be applying for your HELOC with your existing mortgage provider.  You will still need to provide:

• Your most recent mortgage statement
• Any other outstanding loan information and balances you are carrying
• Proof of income

You may also be asked for – or at the very least, your lender might want to take into consideration:

• Your current credit score
• Proof of your net worth
• The value of your home
• Your relationship with them – such as how long you’ve known them and your track record with them.

There will also likely be some fees associated with the issuance of your HELOC.  These may include:

Home appraisal fee – your lender may handle the process on your behalf, and charge you for it. 

Legal fees – as the HELOC involves registering the collateral charge on the home you are borrowing against, a lawyer or notary will be required to do this process, and they will charge you for it.

Title search – your lender will want to ensure there are no outstanding charges or liens against your home. You will be responsible for the cost of this search.

Administration fee – the lender who is responsible for both setting up the HELOC and maintaining it on your behalf will charge for this service.

Discharge fees, cancellation fees – should the HELOC be terminated, a lawyer or notary will again be required to close out the contract and collateral charge; you will be responsible for any such fees.

Insurance fees – your lender may require that you take out insurance against illness, loss of work, etc., so that both you and they are protected against such unforeseen circumstances.

Home Equity Line of Credit – a Source of Money for Many Uses

The value of your home, even with an existing mortgage on it, may be a very useful and affordable source of money, for the various reasons we’ve outlined previously.  When you purchased your home, you made a down payment with hard cash, and during the course of your mortgage, you have increased the equity it possesses.  Whether you are considering applying for a HELOC for investment purposes, or for a much needed home renovation, or to consolidate other existing debts, utilizing your home equity is a tested and proven avenue for accessing money.  Importantly, it is considered a secured form of credit.  This means the home itself is the collateral which the lender holds to ensure being repaid. A HELOC is also a form of revolving credit.  Once established, you can borrow against your HELOC, pay the borrowed money back, and borrow again, up to the limit established in your contract.

With winter fast approaching, your financial planning – for investment purposes, or for whatever other reason, you may want to consider a home equity line of credit as a source for your next financial move.

We hope you’ve found this summary on all things HELOC – Home Equity Line of Credit – a potentially valuable and useful way to access funds for investment or other purposes. If you’re ready to learn about HELOC, contact us today!

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