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A home equity line of credit (HELOC) refers to a special type of loan or credit line, secured by the equity in a borrower's home or property.
The HELOC is different than a conventional mortgage in that the lender establishes a maximum amount of money that the borrower can draw plus the entire sum is not advanced all at once.
With a HELOC, the limit of your line of credit is often calculated based on the market value of your house. The financial institution may arrive at the loan amount by subtracting what you owe on your mortgage from a percentage of the market value of your house. Of course, a person's credit history, income and ability to repay will be also factored into the amount of the loan.
Most Canadian financial lenders will provide no more than 65 percent of the value of your home. Furthermore, they will stipulate that your mortgage balance plus your HELOC cannot equal more than 80 percent of the total value of your home.
It's also important to remember that establishing a HELOC will often incorporate fee payments for application, home appraisal, inspection and other legal requirements.
There is a draw period often associated with a HELOC. The draw period is the length of time a customer will have access to the money, and during which time payments to principal may not be necessary even though interest payments on the borrowed portion may be required. In the repayment period, the borrower will begin to pay off the principal debt plus interest. Different financial institutions will have different payment structures so it's important to understand what is required in specific detail.
Interest rate for a HELOC is calculated in a similar fashion to the variable rate mortgage in that it is tied to the prime rate. The prime rate refers to the interest rate banks and other financial offer to their most creditworthy customers, which is based on the Bank of Canada overnight rate. HELOC rates are usually set at prime + a number and the lender reserves the right to change that number any time.
Some HELOC providers will allow the borrower to convert from a variable to a fixed interest rate during the plan's life, or they may let one convert a portion of the home equity line of credit to a fixed term installment plan.
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