A home equity line of credit also
known as HELOC, is a type of home loan that provides the borrower with equity
in one’s home. This means that, the borrower can build a new line of credit
using its home as the collateral. The rate of interest on this loan is
comparatively lower than the other conventional loans owing to the fact the
loan is backed by an asset i.e. your home.
In Canada, there is a limit on
the value which you can borrow against the home. Particularly, the combination
of the balance of your mortgage and the home equity line of credit cannot
exceed beyond 80% of the value of your home. To put in simple words, you can
access only up to 80% of the total value. To calculate the available equity,
you can multiply your home’s value by 80% and then subtract the current
mortgage from it. The difference will leave you with the amount you can borrow
against the home. In addition to this, there is one more criterion which applies
to the maximum value of HELOC available to you. As per this norm, as a borrower
you need to make sure that the HELOC balance represents a value less than or
equal to 65% of your home’s value.
The
home equity loans in Canada are advanced through a revolving line of credit.
You have the privilege to decide on the credit you want to use. Moreover,
unlike the traditional loans where you have to pay interest on the complete
loan plus the principle amount, HELOC offers you with an advantage of paying
interest on only the amount you withdraw. However, the rate keeps on
fluctuating with changes in the prime rate. This means that, when the market
goes up you may have to pay more on the interest than what the rate was at the
time of loan. Likewise, if the market goes down, you may enjoy the benefit of
lower rate of interest. Most of the borrowers find this factor a big drawback
of this type of loan, as they have to be ready for both ups and downs.
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