Taking a Home Equity Line of
Credit (HELOC) has always remained an alluring prospect for many Canadian
homeowners. By taking a HELOC, homeowners are able to establish a line of
credit with a lender by using their home as collateral. HELOC differs from a home
equity loan in the sense that in the latter, homeowners take out a second
mortgage with a new interest rate while getting a lump sum equaling to the
equity they have in the home. HELOC doesn’t give homeowners a lump sum; instead
they get access to a fixed amount which they can utilize over a period of time,
say 10 years. Although HELOC can be an effective way of getting access to cash
for managing expenses such as home remodeling, paying credit card deb
ts, or for
educational purposes, it carries certain risks with it. As your home is used as
collateral by the lenders, failure to pay off the loan can result in
foreclosure of your property. Considering the fact that a home is one of the
most important investments you will ever make, it is essential that you weigh
in all your options and make an informed decision before taking establishing a
HELOC. Mentioned below are 5 tips that might be useful to you.
Check
the Rate of Interest Offered to You
The rate of interest that the
lenders offer you on a HELOC depends on a lot of factors, the most important
being the government’s housing policy and the overall sentiment in the housing
market. What it essentially means for you is that the rate of interest offered
to you will vary to a great extent with any changes in the policies. Therefore,
it is important on your part to shop around and compare the interest rates that
are offered to you.
Understand
All the Terms and Conditions
Due to the stiff competition in
the HELOC lending market, you might receive a plethora of information and
offers on ‘low interest rates’ or ‘low processing charges’. However, it is
important that you see past the marketing advertisements of the lenders and
understand the intricacies of the offer. A low interest lender might charge you
highly on other financing or processing charges. So before you decide to take
out a HELOC, try to understand the various terms and conditions associated with
the HELOC such as appraisal fees, recording fees, annual fees, transaction
fees, etc.
Get
Clarity on the Balloon Payment
One of the most important
points to consider for most homeowners is the associated balloon payments on
HELOC. It is very tempting for most homeowners to settle for a balloon payment
as the monthly payments are usually lower and you can include them as
tax-deductible items. However, after the term of the HELOC, if the lender does
not approve your reapplication request, you might need to cough up the entire
principal amount at one go. In case you fail to do so, your house might be up
for foreclosure. So it is important that you get clarity on the balloon
payment, and decide prudently whether you will be able to arrange a lump sum in
the worst-case scenario of the lender refusing to approve your reapplication
for HELOC.
Credit
Score Still Matters
Your credit score and credit
history don’t play that important role in determining the rate of interest that
is offered to you by the lenders in case of a Home equity loans. The reason for this is
that in a HELOC, your home is used as collateral, which reduces the risk on
part of the owner. However, HELOC is a line of credit, and therefore, you need
to act responsibly and make payments on time to keep your credit score in good
shape. In fact, apart from using a HELOC to tend to your financial needs, by
making regular payments you can also use it to give a fillip to your credit
score.
Spend
Wisely
However clichéd it may sound,
it is extremely important that you put HELOC to good use, and do not go into a
spending spree. As HELOC gives people an easy access to capital for a long
period of time, a lot of people end up making impulsive purchases which offset
their original plan of taking out the HELOC. We know that using cash wisely is
easier said than done, but one thing that can dissuade you from spending
impulsively is that you should make a mental picture of your home as
collateral, and the fact that it would be on the line if you failed to repay
the HELOC. Unlike other debts, there is an emotional attachment that people
have with their homes, and this should be used as a constant reminder to stay away
from spending unnecessarily.
