July 17, 2018

Advantages & Disadvantages of HELOC

What is a HELOC?  A HELOC is a ‘Home Equity Line of Credit”.  Often consumers think there is no mortgage registered against their home but in fact there is.  A collateral mortgage/charge is registered for the amount that you are authorized to borrow as security in support of the loan amount.

A HELOC is typically requested when you want access to short term financing, for example, doing renovations, debt consolidation or investment and know there will be monies coming in through commissions, sale of stocks, inheritance, etc. that will be used to pay down the loan amount.

The advantage of a HELOC is you only pay interest each month on the amount your borrow.  Whereas when you take out a mortgage, you draw down the full amount and therefore pay interest on the total mortgage amount.  You are also required to make regular monthly payments, so the mortgage is amortized over, say, 25 years in order to pay the mortgage off in full.

The disadvantage of a HELOC is because you pay interest only, if you don’t purposely pay down the HELOC loan, then the balance never reduces.

HELOC’s have increased in popularity over the past number of years because of the low interest rates and because they are fully open with no penalties for repayment.  This type of borrowing has contributed to increased consumer debt as about 40% of HELOC borrowers don’t regularly pay down the principal.

With interest rates rising, it may be a good time to have your HELOC replaced by a traditional good old mortgage product!

Colleen Saunders is a 25 year veteran in the mortgage industry serving Oakville, Burlington, Mississauga and Toronto and offering all mortgage related services such as 1st & 2nd mortgages, private mortgages and more.

To contact Colleen, please fill out the form on  www.mortgagesbycolleen.ca  or call 416-459-2406