Guide to a Home Equity Line of Credit (HELOC)

Unlock the power of your home’s value with a Home Equity Line of Credit (HELOC). Whether you’re considering major home renovations, consolidating high-interest debt, or financing life’s big moments, our comprehensive guide answers key questions to help you navigate the process. Learn how to calculate your home equity, apply for a HELOC, and make the most of this flexible financing tool.

A Home Equity Line of Credit (HELOC) is a flexible financing option that allows you to borrow against the equity you’ve built up in your home (more on this below). Similar to a credit card, a HELOC provides a revolving line of credit that can be used for various purposes such as home improvements, consolidating higher-interest debts, or funding significant life expenses like education or travel.  Like a credit card, you can easily borrow money and repay it, and you only pay interest to the lender on the money you’ve borrowed based on the time it’s borrowed. One key advantage is that interest rates on HELOCs tend to be lower than other forms of unsecured borrowing. 

The amount of home equity you can access largely depends on the current value of your home and how much you’ve paid down on your mortgage. As a rule of thumb, lenders typically allow borrowing up to 80% of your property’s appraised value, minus the outstanding mortgage balance, if the mortgage and HELOC are from the same lender.  If you are getting your HELOC from a different lender than who your mortgage is with, the combination of the two is typically restricted to 65% of your home’s value. Your mortgage broker can help determine the exact amount by using a mortgage calculator and assessing the current real estate market.

1. Assess Eligibility: First, ensure you meet the lender’s requirements by checking your credit score, debt-to-income ratio, and home equity.
2. Calculate Your Equity: Use a mortgage calculator to estimate your available home equity.
3. Select a Lender: Work with a mortgage broker who can guide you in comparing interest rates and terms across various lenders.
4. Submit Your Application: Complete the lender’s application process, providing necessary documentation like income verification and property appraisal.
5. Approval and Agreement: Once approved, review and sign the agreement to access your HELOC.

Home equity is calculated by subtracting your outstanding mortgage balance from the current market value of your property. For example, if your home is valued at $800,000 and your mortgage balance is $500,000, your home equity would be $300,000. A mortgage calculator can be particularly useful for this purpose, helping you understand your financial position and plan for your HELOC application.

Equity that can be accessed through a mortgage or HELOC however is very different.  You can borrow up to 80% of your property’s value.  So the accessible equity you have using the same scenario as above is; Home Value: $800,000 x 80% = $640,000 – Mortgage $500,000 = $140,000.  Your accessible equity in this case would be $140,000 that you might be able to borrow via a HELOC

A mortgage is the primary loan that homeowners take to purchase a property, and carry a consistent monthly payment to repay the principal and interest. The lender maintains a lien on the property until the loan is fully paid off, giving them security over the asset.  It is usually structured with fixed or adjustable interest rates and offers a predictable path toward full ownership over time, known as amortization period.  Mortgages have limits to how much you can repay above your contracted payments, if you exceed these limits you can be charged with prepayment penalties.

In contrast, a HELOC acts as a revolving line of credit secured by the home’s equity. Borrowers can draw funds up to a pre-approved limit during a set period, similar to a credit card, and pay interest only on the amount used. While mortgages often have fixed rates, HELOCs typically come with variable rates, making them sensitive to market changes. Furthermore, a mortgage establishes the foundation of homeownership, while a HELOC allows homeowners to leverage their built-up equity for flexible financing needs, such as home renovations or debt consolidation, without altering the primary mortgage terms.  A HELOC can be repaid in full at any time without a penalty, and once repaid you retain access up the initial limit.  In some cases, the limit on your HELOC can grow as you pay down your mortgage portion, when the two products are linked as one.

HELOC is really a form of refinancing as both offer ways to unlock the value in your home, but they differ in structure and purpose. Home equity, accessed via a HELOC, provides additional funds without altering the terms of your existing mortgage. A HELOC acts like a revolving line of credit with variable interest rates. 

Refinancing of your mortgage, on the other hand, replaces your current mortgage with a new one, usually to achieve more favorable terms, such as a lower interest rate or a longer loan repayment term or amortization. In cash-out refinancing, you borrow more than your existing mortgage balance, taking out the difference in cash to address pressing financial needs. The choice between home equity and refinancing depends on factors like prevailing interest rates and your specific financial objectives. It’s best to consult a mortgage broker as they are well-suited to advise on the best option.

Ready to make the most of your home’s value?

Whether you’re considering a Home Equity Line of Credit (HELOC) or exploring other financing options like a new mortgage or refinancing, it’s essential to understand the best path for your unique goals. Book a call with me today to get personalized advice and expert guidance tailored to your specific needs.

Let’s work together to find the smartest, most strategic solution that will empower you to achieve your home financing goals confidently!