Questions From My Kids: What Is A HELOC and How Does it Work?
If you have been searching for a mortgage or already have one, you’ve likely heard the term HELOC or Home Equity Line of Credit. My kids asked me what a HELOC actually was and they were pretty interested when I was explaining how it works. It’s a fantastic product for folks who are purchasing a home or are refinancing and want to take advantage of the equity in their home.
How Does a HELOC Work?
A home equity line of credit is different from a regular line of credit you would get at your bank. A regular line of credit is an unsecured line of credit, meaning there is no collateral backing the credit account. A HELOC is a secured line of credit, or what I call a collateral mortgage since your home is being used as the collateral for the credit.
Every time you make a payment on your mortgage, the principal on the loan amount decreases and is now considered equity in your home. If you have a HELOC, you can access this equity to spend as you wish. So every time you make a mortgage payment, your HELOC amount goes up.
Now, you can only access a HELOC product if you have a minimum of 20% equity (80% loan to value) in your property. If you’re purchasing a home, you would have to put down a minimum of 20% to access a HELOC. And not all mortgage lenders offer a HELOC so that’s why it’s great to talk to me if this is something you’re interested in.
Why Use a HELOC?
In all my years as a broker, I’ve seen the majority of my clients access the equity in their home at one point or another. They have worked hard to pay down their mortgage to create an asset, why not use it?
A HELOC is a great way to access the equity to:
Go on a large vacation,
Buy an investment property or other investments,
Start an education fund for your kids,
Complete renovations on your home,
Pay down other unsecured debts.
Whatever the reason is, a HELOC is an easy way to make your home work for you.
My Advice on HELOCs
The one thing I caution about HELOCs, as I do with any credit product, is to manage your spending. Depending on how much equity you have to access, it can be easy to overspend with a HELOC so you want to be smart about how you’re spending that money.
But of course, we talk about this when we chat about your HELOC options. And the only other piece of advice I’d leave you with is talk with a broker about your HELOC options. Not every bank is going to have a product like this, so it’s great to shop around...and when my services are free to do so, why not!