What You Need to Understand About Home Equity Lines of Credit
One of the fasted growing types of Debt is Canada is Home Equity Lines of Credit. This money is easy to get, in good supply and hard for most people to resist. It can be used to improve your finances or your living arrangements but there are several problems with it.
RBC released a report recently that indicated the personal lines of credit for Canadians hit $266 billion as of April 2018. This increase is up 3.2% from last year. One story on CBC news recently showed a couple in Toronto with a line of credit of $370,000. This type of debt can climb high quickly, so you need to understand how it works as a consumer.
How a Line of Credit Works
The Financial Consumer Agency of Canada indicates you need to visit a lender to see if you qualify for this type of credit. When we talk of home equity this is the difference between the current unpaid balance of your mortgage and the value of your home. Your home equity will increase over time as the mortgage is paid down and thus the value of the home increases according to the agency.
Easy to Access Debt
The government limits the amount of money available to you at 60% of the appraised value of your home. You can combine a regular mortgage with a line of credit and then you have up to 80% of the appraised value of your home. You only have to make minimum monthly payments so the credit acts in the same way that a credit card does according to the website Get Smarter About Money.
How Many People Have a Home Equity Line of Credit?
22% of homeowners have this type o credit says the Canadian Association of Accredited Mortgage Professionals. This amounts to 2.15 million Canadians that own a home according to 2014 statistics. The average owed by these individuals is $57,000 and around 200,000 of the homeowners owed nothing. Those that had the home equity line of credit didn’t access all the funds that were available to them. The average credit line was $135,000 but the average owed was around $57,000.
Advantages of a Home Equity Line of Credit
- The cash is easy to access and it’s at a cheap price.
- You have great flexibility with the credit. In a mortgage, things are fixed. You can’t go back and get more money once you’re approved for your mortgage. Once you get your home equity line of credit and this is set, you can go up to your limit whenever you feel like it. As long as you fulfill your loan terms than you have no worries. You can pay what you want as fast as you want which ends up ends up lowering your interest costs. Lone of credit with variable rates have been excellent the past few years and the interest rates have been coming down.
- Low-interest debt and borrowing can help you out. You could use this money to improve your home or pay for education.
Disadvantages of Home Equity Lines of Credit
- The bank can change the terms they give you whenever they want as it’s considered open credit. The bank could say they will only give you $50,000 when you received $100,000 before which can be a real burden for you.
- It’s a fast-growing type of debt and can be very attractive which makes it dangerous for some individuals. It could take many years to pay off the home equity line of credit and this could impact the future of your finances in a negative way.
- The interest rate for the line of credit can change and this makes it riskier for the homeowner so you’re at the mercy of what the lender decides to do. You shouldn’t borrow more than you can afford since you may lose your home if you can’t pay the interest and the amount you borrowed.
What People Don’t Consider
Most people take out the home equity line of credit, use this credit and then pay it off. The credit has a very specific purpose, time to pay it off, and action you need to take to repay the credit. You should consider the reason why you take the line of credit in the first place and only get it if you need to. You have less flexibility financially when you have a high debt load to deal with.
If you own a home with a mortgage paid off, you can move when you want to and sell it for what you want. When you have a home equity line of credit in addition to a mortgage, you need to sell the home for enough to pay off the credit line as well as the other debts.
Life can change quickly, and you may get sick, lose your job, interest can go up, or real estate prices can bottom out as well as other factors so you don’t want to be straddled with a huge debt load. Things may be fine now for you but can turn on a dime quite quickly and put you in a financial difficulty. Banks are a business and they will do what they must do regardless of your financial situation. If you miss payments, your financial situation can become quite difficult.
Summary
It’s important to consider your current financial situation before you get a home equity line of credit. This credit line can help you, but it can also burden you financially so take caution before you dive in and be sure to speak to your financial advisor before you proceed.
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