The Home Equity Line of Credit - Flexible Borrowing at Affordable Rate

What is a Home Equity Line of Credit?

A Home Equity Line of Credit, commonly referred to as a HELOC, is a type of flexible borrowing facility available to home owners who meet certain qualifying criteria.  A HELOC is very different from a standard mortgage loan in both structure and function, and can be either be a second mortgage (if there is already a loan on the property) or a first mortgage if there are no other existing loans attached to the property.

 
 

 

home equity line of credit

Helocs allow you to turn bricks and mortar into cash - affordably.

Whereas a regular mortgage has a set repayment amount and fixed interest cost every month, helocs operate differently.  In many ways a HELOC operates much like a bank overdraft or a credit card.  You have a limit that you can use, and can draw against it as you wish, with interest being charged accordingly. 

If you don't  use the facility, you don't get charged interest - simple as that.  This not only provides excellent flexibility, but also equates to huge interest savings over other types of equity release products with the additional benefit of flexible repayments and the ability to redraw funds immediately.

 

Heloc's Vs standard Home Mortgage Loans

 While in most cases a Heloc is a  second mortgage which runs alongside a more traditional fixed rate or adjustable rate home loan, this isn't always the case.  In many cases, if you've already paid off your home and want to raise funds against it, a line of credit is a very attractive option.  Check out our free Calculator to see how much you can borrow.

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Both a standard mortgage loan and a Heloc will give you access to cash secured against your home, however a heloc will allow you added flexibility.  While it has a fixed credit limit that you can borrow up to, your repayment amounts are based on how much of the credit facility you have actually used.  Interest is only charged on the amount you've drawn down on, rather than the total credit limit.  With a standard home loan or equity loan you're paying full interest from day one.  The result of this is that you're paying a lot less interest than you would on a regular mortgage, with a lot more flexibility.

Pro's and Cons of Home Equity Lines of Credit

While HELOCs are great for many purposes, they aren't without their drawbacks.  As with all financial products, a line of credit secured against your home won't work for everyone.  Below are a few of the main advantages and disadvantages of this type of borrowing. 

Advantages of Heloc's

  • Only charged interest on what you use
  • Able to repay as quickly as you like without penalty
  • Easy to draw upon - no need to reapply or fill in new paperwork
  • Borrowings can be used for any purpose you like - just like cash
  • Interest on Helocs can be tax deductible (consult your accountant)
  • Lower interest rates than credit cards and many other loans.
  • can be taken out with a different lender to the main mortgage.
 

 Disadvantages of Heloc's

  • Interest rates can be higher than standard mortgage loans
  • Heloc limit is restricted by how much equity you currently have
  • Easy availability of funds can make it tempting to "impulse buy"

How to use a HELOC 

Home Equity Lines of credit are a great asset to people needing flexibility, or who want access to funds quickly should the need arise.  Because the interest rate on HELOC's  are higher than standard first mortgages, it makes sense to only use them as much as necessary and pay them back as quickly as you can.  Some of the most common uses for these types of loans are:

  • To consolidate high interest debt like credit cards and personal loans
  • For funding renovations or improvements to the property
  • When you have a fluctuating income which can make regular set repayments difficult to maintain
  • To pay for one off projects like a wedding or vehicle
There are plenty of other ways to make use of a line of credit, but in almost all cases these types of loans are among the most affordable kind of equity loan there is.  Higher base interest rates are offset by flexibility in repayment amounts, and the often smaller size of the loan.  A standard Home Equity Loan will also provide you with the cash you are looking for, but it also only provides a fixed static amount of cash in your hand, which may be more, or less, than you need but once it is set up, you will be paying interest on the full balance of the loan rather than what you have actually used of it.  In almost all cases a line of credit is a better option.

Disclaimer:  Any and all information provided on this website should be considered an opinion only and does not constitute financial advice.  Anyone undertaking any sort of major financial move should get formal, professional advice from a qualified specialist