Getting A HELOC: Understanding The Basics

HELOCs offer a low-interest rate loan that is secured by your home, allowing you to get large sums of financing ... Read more

HELOCs offer a low-interest rate loan that is secured by your home, allowing you to get large sums of financing with flexible repayment terms. A home equity line of credit (HELOC) allows you to withdraw, and/or repay up to 15 years. The length of the draw period on a home equity line of credit offers will depend on your credit history and lender requirements. The draw period is an important factor when considering a HELOC. The longer the draw period, the more time (albeit interest will apply) you have before needing to repay it. One of the most common reasons people apply for a HELOC is to take on home renovations or fund repairs. However, this can be risky because you have to make sure that you’re certain you can afford the debt load, otherwise, you risk losing your home. In this guide, we discuss HELOCs and how to determine whether they’re the right fit for your needs. 

What Is A HELOC?

One of the most valuable features of a home equity line of credit is its flexibility. Home equity lines, or HELOCs, are revolving loans that allow you to borrow against the value of your home anytime for a specific amount. A HELOC is a type of home loan that uses your house as collateral in the event you default on it. You can take up to 80% of the home’s value and pay it back with interest anytime during the draw period. HELOCs have no limitations on what the funding may be used for. They can cover everyday expenses like household costs and car repairs or unexpected needs, such as house emergencies like plumbing or heating problems, and home renovations. 

How To Qualify For A HELOC

To qualify for a home equity loan, you’ll need an equity or down payment of at least 20%. Stand-alone home equity loans require a 35% equity or down payment to be approved. The lender will need proof that you have a stable income and manageable debt loads before approving your loan application. Federal HELOC borrowers must qualify for a mortgage stress test. This is determined by the Bank of Canada’s five-year interest rate or your lender’s offer plus 2%. Lenders will check to see if you can afford future payments if your interest rates were to increase over the next five years. Qualifying for a home equity line of credit (HELOC) can be challenging because each lender has different qualifications. To qualify, you’ll need to have enough equity in your home, maintain a certain income and debt ratio and meet the lender’s requirements regarding credit score.

HELOC Qualification Requirements

  • Minimum home equity of 20% accumulated.
  • Credit Scores range between 650-740+ (credit scores of 740 and higher are more likely to be approved and receive lower interest rates).
  • The debt-to-income ratio is between 40%-50%.
  • Some lenders will accept a debt-to-income ratio between 36%-47%.
  • Proof of income; t4s, pay stub statements and bank statements for up to the last 3 months.

How much does it cost to get a home equity line of credit (HELOC)?

HELOCs have both upfront and ongoing expenses. When applying for a home equity line of credit, check with your lender to see what the upfront costs are. The fees will depend on how much money you ask for and the interest rates offered by your lender. There are many upfront costs of a home equity line of credit, including an appraisal fee (depending on your locale), origination fees, legal fees to register the collateral claim for your loan, administrative fees. These upfront costs will differ from lender to lender; it is best to get quotes from multiple lenders in order to find the most cost-effective rates and lowest possible fees.

Tips On How To Select A HELOC Lender

Many lending agreements contain a so-called “margin,” which is an additional amount added to the base interest rate. If your loan has an introductory 4% rate and a 3.5% margin, you will be paying 7.5%. The automated system might not include the margin in your introductory period’s calculation of interest due, so it’s essential to ask whether or not margins apply when considering loans with different rates during differing periods of time.

Look into the loan costs for a HELOC. The upfront cost for a loan may vary, so it is important to ask your lender about the specific costs. You will also need to consider recurring fees that you might need to pay depending on how much money you request and what rates are available. There may be; an appraisal fee (depending on where you live), origination fees, legal fees to register the collateral claim for your loan, administrative fees, closing costs or discharge fees. These upfront costs will vary from each lender so it is good to get quotes from multiple lenders to get the best rates and lowest fees.

The interest rate you are quoted when you first apply for the HELOC is the starting rate. Usually, the starting rate is only good for a few months. HELOC rates are variable and may increase depending on the prime rate. Make sure you are prepared to extend your monthly payments to compensate for those cost increases.

How To Get A Home Equity Line of Credit

Lenders offer easy, online applications for their home equity line of credit loans. Before applying, gather all the documentation your lender will likely want to see to streamline the process. Common documents include tax receipts, pay stubs and bank statements. Fill out the application form correctly for a more seamless experience.

6 Steps To Getting Your HELOC:

1. Establish Qualification

Before you can be approved for a loan, you will need to know your credit score and take steps to improve it if possible. Knowing the various rates at which lenders offer loans can help you estimate potential costs before speaking with them about qualifications. You may also be asked to provide relevant documents like pay stubs, tax returns, and investment or bank statements when obtaining quotes.

2. Determine Home’s Value

Lenders require equity of at least 20% to qualify for a home equity line of credit, so it’s worth assessing whether you have enough built up before applying. Your lender will need to appraise your home before they can approve this, so be ready for that expense if you go this route.  Consider whether the benefits of getting a Home Equity Line Of Credit outweigh any setup and ongoing costs before committing to one. Your home equity is determined by the market value of your home minus what you owe on your mortgage. To calculate your accumulated equity use this method; 80% of your home’s value minus the remaining balance on mortgage=Home Equity.

3. Compare Rates

To find the best rates, shop around from various lenders before negotiating loan terms. Lenders may offer a lower interest rate or additional perks, like covering some of the closing costs if you ask.

4. Apply For The HELOC

Once you have found a lender that offers the lowest interest rates, fill out the application for your loan. Many lenders will have an easy online application form to fill out but some of the smaller lenders may want you to apply in person or by post.

5. Signing The Disclosure Documents

Once full approval has been granted, you will have to go over and carefully read your loan disclosure agreements. Look over the fine print of the disclosure agreements to ensure you are satisfied with the terms before signing.

6. Receive Funding

For some lenders, it can take 24 hours to receive your funds. However, the timeline may be longer for other lenders. Once all the processing is completed, you will be able to access your Home Equity Line of Credit (HELOC) and draw from it periodically for the duration of the loan.

Is A Home Equity Line Of Credit (HELOC) Right For Me?

A HELOC can be helpful when you need to pay off debt, but it has the potential to make your financial situation worse. If you are using a HELOC to get out of debt, talk with a debt counsellor about creating an affordable payment plan that is designed for getting back on your feet financially. Although the HELOC can be a great way to take advantage of your home equity and finance a large purchase, it is not appropriate for all homeowners.  It is important to consider the various factors associated with this form of loan in advance before applying for it.

As long as you repay your home loan by monthly installments throughout the minimum period set out in your agreement, this option is very beneficial. HELOCs are the best option over other loans if you want to save interest and prepayment penalties that you would incur with other types of loans. There are no prepayment penalties for paying off the balance of your loan or selling a home during the draw period. You only pay interest on the money that you use from your HELOC and not on the total loan amount as with some other loans.

The Bottom Line

Home equity loans are a great way to finance large purchases, consolidate debt and repair your home, but you must consider the factors before applying. Although a HELOC may be perfect for some people, not everyone will qualify for this type of loan. Even if you have built up enough equity to qualify, you must think about the various factors associated with the loan in advance before applying. Home equity lines of credit can be a useful tool for those looking to access their funds for up to 10-15 years, depending on the draw period. Although a Home Equity Line of Credit (HELOC) can be beneficial in many ways, you will need to give careful consideration before taking on this type of debt. You will need to be comfortable putting your home as collateral and have the funds available to pay down the loan. When looking into the option of a HELOC, compare rates so that you find the best fit for your finances and future financial goals. When looking into a Home Equity Line of Credit, it is best to shop around for the best rates and lowest fees to make sure it is the right choice.

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If you are struggling with debt we can help.  If you’re concerned about your credit score, we’ve got you covered. We have a variety of loans available to suit any financial situation. Whether you’re looking for a mortgage, need debt consolidation, financing for a personal project or renovation, we’ll work with you to find the right option for your financial situation.  Apply Today and Get the Loan You Need!