All About Getting a HELOC: Home Equity Line of Credit

If you are considering refinancing your home, it is important to determine if a HELOC (Home Equity Line of Credit) is the right option for you. It is becoming a more popular option as it allows for greater flexibility to your funds.

You are able to access up to 80% of the value of your home when refinancing, but with a HELOC you are limited to 65% of the value of your home. The value of your home is often referred to as loan to value or LTV. Let’s break down the math! Home value: $350,000, 80% of value – maximum LTV for a refinance = $280,000, 65% of value – maximum LTV for a HELOC = $227,500 You do have the ability to combine products to maximize your loan. By managing different components, you can still access up to 80% LTV. Here is an example using the 65% LTV for the HELOC and the remaining 15% available for the mortgage component: HELOC component of $227,500 Mortgage component of $52,500 Both components = $280,000

Another example would be if you have an existing mortgage for $70,000 on your home valued at $350,000. If you keep this existing debt in a mortgage product, you can still unlock up to 80% LTV with the HELOC, as the HELOC funds are not more than the initial 65% LTV, for example:

Home value: $350,000, 80% of value – maximum LTV for a refinance = $280,000 HELOC component of $210,000, Mortgage component of $70,000 Both components = $280,000

The interest rate on a HELOC is generally higher than that of a typical mortgage as you have the advantage of having a fully open term, which essentially means you can draw or pay off the funds whenever you wish without penalty. With the higher interest rate in the HELOC, its is advantageous to the borrower to place your current mortgage debt into a fixed mortgage product, which would have a much lower rate, as opposed to the HELOC. There are many benefits to having a HELOC and you can use the funds as you wish – complete a renovation, gain the down payment to purchase an investment or vacation property, have the funds ready to help with your child’s education or an emergency, or reinvest the funds for a high return.