(Pixabay.com)

(Pixabay.com)

Loan 101: What’s a HELOC?

Unlike a conventional home equity loan, a HELOC doesn’t give borrowers the full amount upfront

A home equity line of credit, or HELOC, is a loan that lets you borrow against the equity in your home. It’s typically offered as part of your mortgage by a financial institution, but it can also be a stand-alone loan.

Unlike a conventional home equity loan, a HELOC doesn’t give borrowers the full amount upfront. Instead, HELOCs are open lines of credit borrowers can use up until a set amount based on the amount of equity in their home. If the HELOC is tied to your mortgage, the amount of credit available will go up as you pay down the principal on your mortgage.

A stand-alone HELOC, however, gives you a set amount. You can apply for one with any lender, not just your mortgage lender.

HELOCs have to be repaid with interest, and include minimum monthly interest payments, but you only pay interest on the amount you borrow. While you can make lump sum payments at any time, the total amount borrowed (plus interest) has to be paid off when the set loan period ends.

When is a HELOC useful?

HELOCs can be great for accessing cash if you need it, because these loans let you tap into your equity without having to ask for more credit or wait for approval.

They’re often used only for specific purchases, such as a car or a home renovation project, not for everyday expenses.

They can also help you consolidate debt and reduce the interest you’re paying if you have outstanding credit card debt (which comes with a much higher interest rate) or other loans, or if you simply want to have access to more funds. And since your home secures the HELOC, the interest rates on these loans tend to be set at prime with a small markup – which is much lower than other types of debt.

Those with a stand-alone HELOC can use it instead of a traditional mortgage to buy a home. That often means you have to make a bigger down payment, but it’s an option that provides more flexibility because there’s no set repayment schedule.

What to watch out for

The danger with HELOCs is that the availability of cheap credit can make you feel like you have money to spend that you really don’t. When you’re using a home equity line of credit you’re borrowing against your house, not using money you saved, so you can end up in constant debt. If you keep borrowing you’re also going to take a lot longer to pay down your mortgage.

Like with any loan, there’s also always the risk that interest rate changes will increase your monthly payments or that lenders roll them back in some way (either demand full payment or reduce your credit limit) since banks and other lenders can change the terms of their loans at any time.

The failure to use HELOCs judiciously was one of the reasons behind the 2008 subprime mortgage crisis in the United States, so whatever approach you take, you need to use a HELOC carefully to avoid becoming overdrawn and risk losing the collateral used to secure the loan: your house.

Romina Maurino is a freelance journalist and the editor of The Financial Pipeline.

Like us on Facebook and follow us on Twitter.

Want to support local journalism? Make a donation here.

Financial Pipeline

Just Posted

Starting in 2022, the Columbia Shuswap Regional District is extending dog control to the entire Electoral Area D area. (Stock photo)
Dog control bylaw passes in Shuswap area despite ‘threatening’ emails

CSRD board extending full dog control to Electoral Area D; director calls for respectful discussion

The new Civic Memorial Park will incorporate pieces of the 80-year-old arena it replaces. (Artists rendering)
Pieces of Civic Arena reclaimed for new Vernon park

City centre space to incorporate wood from the historic arena

Fruit farmers in the Okanagan and Creston valleys are in desperate need of cherry harvesters amid COVID-19 work shortages. (Photo: Unsplash/Abigail Miller)
‘Desperate’ need for workers at Okanagan cherry farms

Fruit farmers are worried they’ll have to abandon crops due to COVID-19 work shortages

A motorycle crash has been reported on Westside Road. (Google Maps)
UPDATE: Westside Road reopened following motorcycle crash near Vernon

AIM Roads advises drivers to expect delays due to congestion

An Armstrong family that lost their home to a fire on Wednesday still hasn’t found their cat as of Friday, June 18, 2021. (Facebook photo)
Family cat still missing, days after fire destroys Armstrong home

There were no injuries from Wednesday’s blaze, but two days later there’s still no sign of the white feline

A small pod of Pacific white-sided dolphins pass by close to shore in Campbell River June 16, 2021. Still capture from video courtesy of Kimberly Hart
VIDEO: Dolphin sunset captured from Vancouver Island shore

Spectacular setting for view of travelling pod of Pacific white-sided dolphins

A aerial view shows the debris going into Quesnel Lake caused by a tailings pond breach near the town of Likely, B.C., Tuesday, Aug. 5, 2014. THE CANADIAN PRESS/Jonathan Hayward
Updated tailings code after Mount Polley an improvement: B.C. mines auditor

British Columbia’s chief auditor of mines has found changes to the province’s requirements for tailings storage facilities

A North Vancouver man was arrested Friday and three police officers were injured after a 10-person broke out at English Bay on June 19, 2021. (Youtube/Screen grab)
Man arrested, 3 police injured during 10-person brawl at Vancouver beach

The arrest was captured on video by bystanders, many of whom heckled the officers as they struggled with the handcuffed man

Patrick O’Brien, a 75-year-old fisherman, went missing near Port Angeles Thursday evening. (Courtesy of U.S. Coast Guard)
Search for lost fisherman near Victoria suspended, U.S. Coast Guard says

The 75-year-old man was reported missing Thursday evening

Bruce Springsteen performs at the 13th annual Stand Up For Heroes benefit concert in support of the Bob Woodruff Foundation in New York on Nov. 4, 2019. (Greg Allen/Invision/AP)
Canadians who got AstraZeneca shot can now see ‘Springsteen on Broadway’

B.C. mayor David Screech who received his second AstraZeneca dose last week can now attend the show

New research suggests wolves can be steered away from the endangered caribou herds they prey on by making the man-made trails they use to hunt harder to move along. THE CANADIAN PRESS/Nathan Denette
Culling cutlines, not B.C. wolves, key to preserving caribou herds: researcher

The government has turned to killing hundreds of wolves in an effort to keep caribou around

Gary Abbott (left) and Louis De Jaeger were two of the organizers for the 2014 Spirit of the People Powwow in Chilliwack. Monday, June 21, 2021 is Indigenous Peoples Day. (Jenna Hauck/ Chilliwack Progress file)
Unofficial holidays: Here’s what people are celebrating for the week of June 20 to 26

Indigenous Peoples Day, Take Your Dog to Work Day, Onion Rings Day all coming up this week

Gwen Spencer Hethey with her uncle and mentor Major Frederick Richardson. (Courtesy of Greater Victoria Sports Hall of Fame)
‘She was a killer’: The B.C. woman who pioneered female sharpshooting

Gwen Spencer Hethey made military men ‘look like turkeys’ says her son

Most Read