What to know about Heloc loans. For starters, they are one of the most versatile products a homeowner can have. Homeowners looking to remodel, renovate, or redo part of their home often look into loans and lines of credit to cover the cost. Home equity lines of credit (HELOC) give the borrower a chance to use some of the equity they’ve saved up in their home.
Unfortunately, there is often confusion about how to qualify and how the loans work which might make some shy away. We hope to clear up some of this confusion because HELOCs are a great choice for most homeowners.
What Is a Home Equity Line of Credit?
Before you can understand a home equity line of credit, you’ll need to learn about some other key phrases.
First, equity. Equity is the difference between how much your home is worth and how much you owe. You can also describe it as the portion of your house that you own after making payments.
The other term to know about is a second mortgage. A second mortgage is a second loan against your home that’s either independent of or in conjunction with your original mortgage. Eventually, you might be able to consolidate these mortgages into one.
A home equity line of credit is one form of a second mortgage that allows homeowners to borrow against their equity for various purposes. It differs from a loan, which is a fixed amount extended by a lender. A home equity line of credit lets borrowers continually use a portion of their equity until they reach a fixed percentage.
How Much Can I Borrow With a HELOC?
In Canada, the general rule of thumb is that a borrower can use up to 65% of their home’s purchase price or market value in a HELOC. A good mortgage broker can help leverage as much as 80% of the value of your home.
In addition, in Canada, you can finance your home for up to 80% of its value. Your combined loan to value (LTV) is a measurement of how much of your property is financed in proportion to its value.
It’s important to note that your LTV, including your mortgage, can’t be more than 80% of the value when refinancing or adding a Heloc. You can use the money for any purpose, even one outside of your home. Some people use HELOCs for vacations or to pay for their child’s college tuition.
Pros of HELOC Loans
Interest Rate Options: Some HELOCs have an adjustable interest rate, which is a benefit for borrowers who want a low rate at the beginning of their term. Adjustable interest rates also let the borrower secure a lower rate when they begin to fall without having to refinance. Some lenders also allow borrowers to convert their mortgage to a fixed interest rate, so homeowners that like to play it safe can have a stable and budget-friendly plan.
An Almost-Unlimited Amount of Credit: While some spenders might dislike the idea of any limit on a HELOC, this type of mortgage really does afford the borrower a large amount of money. If your home is valued at $300,000, for instance, and you have a remaining mortgage of $150,000, you could hypothetically borrow $90,000 as needed if you have an excellent credit score.
How Can I Qualify for a HELOC Loan?
Qualifying for a HELOC is a straightforward process. You have to own your home and you must have at least 20% equity in it to qualify for most HELOCs. Proof of income is also important since lenders want to ensure your income is enough to cover payments and interest.
Speaking of income, your debt-to-income (DTI) ratio will also likely play a major factor in your application. Lenders will look at your pre-tax income and estimate how much of that sum is dedicated to debt payments. Creditors want to ensure you’ll have enough income left over to comfortably repay them, too. A good DTI is 40% to 50% or less than your income.
The last prerequisite is a good credit score. This is arguably the best indicator of your reliability as a borrower. An excellent credit score north of 700 is always a safe place to be, but even homeowners with a score a little lower will likely secure a good HELOC loan from a reputable lender.
Is a Bad Credit Score an Automatic Disqualifier?
Bad credit HELOCs do exist, and homeowners who know who to work with can qualify, provided they have sufficient equity. Borrowers should look for a reputable mortgage broker who specializes in bad credit home equity lines of credit.
Things To Remember
It’s important to remember that HELOCs with adjustable interest rates may see their rates increase from time to time. Homeowners can prepare for this by sticking to the amount they originally planned to borrow and creating a detailed budget. By not taking out more than originally planned, borrowers can also avoid owing more than their home is worth because of market volatility.
Your HELOC loan is secured with your home as collateral. This means that your home is a sort of backup in case you’re unable to make payments. This offers numerous benefits, including lowered interest rates.
People that can secure their loans with a home or another asset also qualify for more loans, even if they don’t have an exceptional credit score. You might be able to secure a bad credit HELOC even without the best credit score thanks to your home.
Home equity lines of credit are good options for homeowners with a stable income and enough equity to make this option worthwhile. Not sure if you’ll qualify?
Turnedaway.ca has been helping homeowners just like you get approved for home equity lines of credit. Apply Now or call us toll-free at 1-855-668-3074 to discuss your eligibility and options.