Home Equity Line of Credit (HELOC) is a type of Second Mortgage that’s given to the borrower based on the available equity in their property. It has a much lower rate of interest as compared to a traditional line of credit.
Home equity is calculated by deducting the outstanding Mortgage balance from the current appraised market value of the home. As the borrower pays off their Mortgage and builds up equity in their home, a HELOC can give the borrower the means to borrow a part of these funds again.
HELOC funds can be used for Home Renovations, Debt Consolidation, paying higher educational expenses or for any other purpose.
The borrower can use as much or as little of their HELOC balance as they chooses to do so. The best part of a HELOC is that the borrower would only have to pay the interest on the amount that they have withdrawn and not the entire limit of the loan unlike a Second Mortgage or a Home Equity Loan.
The borrower has to qualify for and be approved for a Home Equity Line of Credit only once. After that the borrower can access his/her Home Equity Line of Credit whenever they elect to do so.
Generally, a minimum down payment or available equity of at least 10% to 20% is required in order for the borrower to get approved. The borrower also needs to have an acceptable credit score, proof of sufficient income, an acceptable level of debt servicing ratios in relation to his/her income, property deed proving ownership, current Mortgage details and an appraisal report confirming the current market value of the property.
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HELOC RATES IN CANADA
A HELOC usually has a variable rate of interest based on a lender’s prime interest rate. These rates are not fixed over any duration of the loan and will change when the prime rate changes. A Home Equity Line of Credit generally has an interest rate of prime plus one percent. However, the borrower can negotiate the interest rates with the lender.
FEES INVOLVED WITH A HOME EQUITY LINE OF CREDIT
Common fees involved with Home Equity Lines of Credit include home appraisal fees, legal fees, title search fees, administration fees and discharge or cancellation fees.
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As a first time home buyer, we required a Mortgage broker who was willing to be very patient with us and to explain every detail of the Mortgage loan process and provide us with as much information as possible. Shawn informed us of the exact required down payment amount (based on the types of lenders that we qualified for), fees, closing costs, Land Transfer tax etc. Shawn was very good in providing us with accurate rates, figures and calculations which we realized we could afford the monthly Mortgage payments and make the Home Purchase work. One other important factor was that Shawn kept on top of our file by updating the progress every step of the way which was very important to us. Shawn is very proactive which we appreciated!
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Shawn demonstrates excellent customer service skills. He’s always very quick to respond to my emails and calls. Shawn helped me get approved twice in the past year alone and I hope to work with him again in the near future. Shawn was very friendly, attentive and dedicated his time and effort by providing me with solid knowledge, expertise and advice which in return helped the process of purchasing my first home very easy and stress free. Shawn even followed up on my behalf with my lawyer in order to finalize all the details. I would highly recommend his services.
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Shawn had helped my wife and I obtain a 2nd Mortgage from a Private Lender last year. We used the majority of the Mortgage loan proceeds to help renovate/upgrade our home. Once the refurbishments had concluded, we ordered a new appraisal and noticed that our house value had increased substantially. The following year, Shawn helped us refinance both our Institutional and Private Mortgages into a new low rate, 1st Mortgage with an A Lender (Bank) which is going to help us save an extensive amount of money in monthly payments moving forward. I’m very thankful for Shawn’s knowledge, skills and expertise within the mortgage industry which ended up helping us save thousands of dollars.