A home equity line of credit is sort of like a credit card. Your lender allows you to borrow small amounts against the equity of your home as you need them, rather than giving you one lump sum like you would get with a home equity loan or home improvement loan. The ability to draw these small sums a little at a time benefits you in a few ways:
- You don’t borrow more than you need. It’s usually hard to estimate the cost of a remodel up-front, and with this strategy, you don’t have to; you can charge as you buy materials and pay individual contractors
- You don’t have to worry about accidentally spending a lump sum sitting in a bank account.
- You can take your time making the improvements rather than trying to scramble and fit everything in before prices increase
- Must have a minimum of 35% down
- Able to take mortgage that resembles a line of credit
Home Equity Line of Credit
This program operates like a Line of Credit and uses the home as equity for security. To be able to qualify for a HELOC a minimum of 35% down is required in initial down payment or equity. The aspects of this program are
- Since it operates like a line of credit the principal amount does not decrease, so as it is paid down the available amount can be used for other purchases at often a lower interest rate
- The minimum monthly payment on this mortgage is usually “interest only”. However, there is no penalty for paying down the principal amount as there can be with locked in mortgages.
- The interest rate is variable which means that it is a prime + loan. This rate fluctuates alongside prime so the interest payments are not always the same set amount.
- No mortgage insurance premium is usually required since it is a conventional loan with the large down payment.
- Requires 35% in down payment or equity in the property
- Minimum credit score of 600 to 620 depending on lender
- No outstanding personal taxes
- Appraisal may be required by lender
- Notice of Assessment
- Employment letter if employee
- Recent pay stub if employee
- Proof of Business if self employed
- Other documentation may be required specific to each individual deal
- A HELOC can be locked into a term at any time, however it cannot be reversed again without a payout penalty. When paying out a HELOC for what ever reason if you sell, remortgage there is no payout penalty.
- The payment fluctuates over the term of the mortgage and prime adjusts.
- The interest rate on a HELOC is typically Prime + .5-4% depending on he credit and lender qualifications.