Home Mortgage & Home Equity Line of Credit (HELOC)

Home Mortgage or HELOC? Which One Is Right For You?

Mortgage vs. HELOC

Are you trying to decide between a Home Equity Line Of Credit (HELOC) and a mortgage and not sure which product is better suited for you? Both can be used as financing for a home purchase or as a way to access existing equity in your property. There are however some significant differences between the two products:



Mortgage

Home Equity Line of Credit

Takeaways

Maximum Loan-to-Value (LTV)

95% LTV for a home purchase; 80% LTV for refinancing

65% LVT (total LTV of 80% when pooled with a mortgage)

Getting a HELOC on its own: It won’t work unless you have at least 35% down (or equity in your home)



Getting a HELOC with a mortgage: It won’t work unless you have at least 20% down (or



equity in your home)

Borrowing

Full amount is advanced



Amount cannot be re-advanced (unless terms of the mortgage allow it)

You choose how much you want to advance



Amount is re-advanceable (can re-borrow funds at any time)

If you perceive that you’ll need to use the equity in your home in the future or want to establish a “rainy day fund” a HELOC is likely the better option

Payment Flexibility

Can be either closed (pre-payment restrictions) or fully open (no pre-payment restrictions)

Fully open

First decide whether you need full payment flexibility:



- If you do: either an open mortgage or HELOC would be suitable



- If you don’t: a closed mortgage would be suitable

Rate

Fixed mortgage: rate is guaranteed for the duration of the term



Variable mortgage: Rate fluctuates based on the prime lending rate and a guaranteed spread for the duration of term

HELOC rates fluctuates based on the prime lending rate and a spread which is not guaranteed



Rates tend to be higher on HELOCs

Your risk tolerance to an increase in interest rates should be a factor in determining which product you should choose when trying to decide between a mortgage and a HELOC to finance a home purchase



Payment

Interest + Principal Payment

Interest Only Payment

While a HELOC only requires an interest only payment and thus results in less of a strain on your finances, it works best for financial disciplined borrowers. A Mortgage forces you to pay off the principal over time given its payment structure.

Effect on credit bureau

Not reported to the credit bureau

Reported to the credit bureau

Missing payments on a HELOC can hurt your credit score



You don’t necessarily have to choose one or the other, you can often have both a mortgage and a Home Equity Line of Credit. While a mortgage is the more popular primary product when needing financing for a new home purchase, a Home Equity Line of Credit is often a secondary product that home owners get after paying off a significant amount of the mortgage in their home.


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