By Jasmin Brown

BDO Debt Solutions

Home Equity Lines of Credits (HELOCs)

Jul 13, 2023 | 1:20 PM

“The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of Pattison Media and this site.”

Many people are looking at doing home renovations right now.

As a result, people are exploring different ways of financing those renovations. One common way of financing home renovations is a home equity line of credit, or HELOC. Home renovations can be exciting, but it is so important to be sure that the expense fits within your budget before getting started. It is especially important right now to think about the cost of borrowing on a HELOC because interest rates are already high. Further increases will result in increased costs of borrowing.

What is a home equity line of credit?

A home equity line of credit is a source of revolving credit with a set limit, which is secured against your house. This means that your house is used as collateral for the loan. In order to qualify for a home equity line of credit, you must have equity in your home. Equity in your home is the difference between the market value and any mortgages or debts already secured against the house. A HELOC will include two periods: the draw period and the repayment period. Combined, these two periods typically last 25 – 30 years. During the draw period, which typically lasts 5 – 10 years, only interest is due on the borrowing. During the repayment period, which typically lasts 10 – 20 years, both principal and interest must be paid each month.

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What are the benefits of a home equity line of credit?

There can be benefits to obtaining a home equity line of credit. Some of these benefits include:

· Accessing equity in your home for renovations or other large purchases;

· Obtaining a lower interest rate on credit, since the debt is secured against your house;

· Having the flexibility to borrow as much or as little as is needed, up to the maximum credit limit;

· Being able to pay back money borrowed at any time without prepayment penalties;

· Having the ability to use and pay off the debt as many times as needed throughout the draw period.

What are the risks associated with a home equity line of credit?

While a home equity line of credit does have some benefits, there are also risks involved as well. Some of the risks include:

· Having access to large amounts of credit can result in impulsive and unnecessary spending;

· Securing debt against a house, which is usually a borrower’s most valuable asset, can be risky because if you stop paying, or you are unable to pay, you could lose your home;

· Incurring debt with a variable interest rate makes you susceptible to increases in rates, resulting in a higher payments, which is particularly concerning right now as we continue to see interest rate hikes;

· Entering into the repayment period can be difficult because the requirement to pay both principal and interest can result in significantly higher payments depending on the amount borrowed;

· Experiencing a worsening financial situation or decrease in value of the home could cause your bank to demand payment of the loan, putting you in a very difficult financial situation.

It is clear that there are benefits and risks of home equity lines of credit, so it is always important to do your research. It can be dangerous to have access to large amounts of credit if you easily give in to spending temptations. A home equity line should not be used for everyday expenses that you are unable to otherwise afford. If you are considering a home line of credit to consolidate debt, it is recommended that you speak to a Licensed Insolvency Trustee first. They will explore alternative options with you so that you have the information you need to decide how you should move forward.

If you are having trouble making ends meet each month, finding the right debt solution can help. Visit the BDO Debt Solutions website for more information about bankruptcy, or call 1 855 BDO DEBT to book a free, no obligation consultation.

Jasmin Brown is a Senior Vice President overseeing the insolvency practice in Saskatchewan. She is committed to providing creative and practical debt solutions with empathy, understanding and professionalism to help people overcome their financial difficulties.