FDIC-Insured - Backed by the full faith and credit of the U.S. Government
FDIC-Insured - Backed by the full faith and credit of the U.S. Government
Secured against your property, this type of loan lets you borrow what you need up to an approved credit limit.
You’ll need to repay this money over an agreed term.
A HELOC works by letting you borrow the available equity in your home, which you can use to cover anything from home improvements to debt consolidation. As you repay this line of credit, you’re effectively replenishing your equity. You can then borrow this money again if another cost pops up. A bit like a credit card.
You can use what you’ve borrowed however you like, but certain uses can make more sense than others. For example, using a HELOC for home improvements could add value to your property. Additionally, paying off high interest credit card debt may help you save on interest payments and fees.
There are generally 2 phases to a HELOC:
The draw period is when you’re able to withdraw the money you want to borrow, up to your credit limit. During this time, you typically only need to pay interest on what you borrow. The draw period can last up to 10 years.
At the end of the draw period, the HELOC will transition to the repayment period. Here, you’ll need to make principal and interest payments on the amount drawn from the line. No money can be borrowed during the repayment period, which can last up to 20 years.
The terms of your HELOC can vary but it can be up to 30 years in total.
The amount you’re able to borrow will depend on how much equity you have available. You can work this out by subtracting how much you owe on your mortgage from how much your home is valued at.
For example, if your mortgage is $150,000 and your property is valued $350,000, you’d have $200,000 equity. You can typically borrow up to 85% of the value of your home, minus your first mortgage balance.
You may need to meet other criteria to be eligible for a HELOC.
| Advantages | Disadvantages |
|---|---|
| You may get lower interest rates compared to credit cards or personal loans as it’s secured against your home. | You could lose your property if you fall behind on payments. |
| Draw only the amount needed so the interest payments are based off the used credit, not the total credit line balance. | You’ll have less equity built up. This can be an issue if the value of your property decreases and you want to sell, or you’re refinancing to cover the loan. |
| You may be able to deduct the interest on your taxes if the money is being used to improve your home. You may want to speak to a tax advisor about this. | Many HELOCs only allow interest-only payments on the money they borrow during the draw period, which could lead to a final lump sum payment (balloon payment). |
| Advantages | You may get lower interest rates compared to credit cards or personal loans as it’s secured against your home. | You may get lower interest rates compared to credit cards or personal loans as it’s secured against your home. |
|---|---|---|
| Disadvantages | You could lose your property if you fall behind on payments. | You could lose your property if you fall behind on payments. |
| Advantages | Draw only the amount needed so the interest payments are based off the used credit, not the total credit line balance. | Draw only the amount needed so the interest payments are based off the used credit, not the total credit line balance. |
| Disadvantages | You’ll have less equity built up. This can be an issue if the value of your property decreases and you want to sell, or you’re refinancing to cover the loan. | You’ll have less equity built up. This can be an issue if the value of your property decreases and you want to sell, or you’re refinancing to cover the loan. |
| Advantages | You may be able to deduct the interest on your taxes if the money is being used to improve your home. You may want to speak to a tax advisor about this. | You may be able to deduct the interest on your taxes if the money is being used to improve your home. You may want to speak to a tax advisor about this. |
| Disadvantages | Many HELOCs only allow interest-only payments on the money they borrow during the draw period, which could lead to a final lump sum payment (balloon payment). | Many HELOCs only allow interest-only payments on the money they borrow during the draw period, which could lead to a final lump sum payment (balloon payment). |
Most HELOCs have variable interest rates, so the interest can rise and fall with the market – meaning you could be paying a different amount each month.
Some lenders let you set up all or a portion of the outstanding balance as a fixed rate loan during the draw period. This can help with budgeting your monthly repayments each month.
There may also be upfront fees to consider, such as application fees or early closure fees. Ask your lender about costs if you’re considering a HELOC.
