How A Line Of Credit Works

When homeowners need quick access to quick cash

, they might find that a home equity line of credit is their best option. These lines of credit, a type of second mortgage, allow homeowners to tap into the existing equity in their home and borrow against it. In return, they are given a revolving line of credit from which they can withdraw funds, as little or as large as they need, over a long period of time. But just how does a home equity line of credit work? And what does a homeowner do when its time to apply for one?

Typically, home equity lines of credit will allow a homeowner to borrow up to 80% of the equity they have built up in their home; that is, the amount of their mortgage that they have already paid, or the amount in which they have increased the value of their home. So if a homeowner has a $200,000 first mortgage on their home, but through their down payment and monthly mortgage payments, they have built up 50% equity in their home or, $100,000. 80% of that amount would be $80,000, which would be the total amount a homeowner would be eligible to borrow when applying for a home equity line of credit. Often in major cities and urban centres, lenders can be more lenient and even offer up to 90% of the equity in the home. In the above scenario, that would increase the loan amount to $90,000.

Once a homeowner is approved for a home equity line of credit, they will have access to a revolving line of credit that has a limit for the full amount of the loan. The homeowner can withdraw money from the line of credit any time they need, usually through something that is much like an ATM card.

Home equity lines of credit work strictly on a variable interest rate and so, they can be an especially attractive option for homeowners when the federal governments overnight lending rate is low. The interest is also the only portion of the payment that will be due every month until the end of the loan; and often, this is an undetermined time. While its not required that homeowners make payments on the principal over the course of the loan, its advisable that they do, especially if they want to avoid a large payment at the end of the loan. Lenders can also often discontinue the line of credit on a home at any time, leaving borrowers surprised with the large principal amount that theyre now expected to pay back in a very timely manner.

If youre a homeowner and think that a home equity line of credit is the best way to tap into the equity in your home, and get that extra cash needed for unexpected expenses, speak to a mortgage broker that can help. Theyll have access to the best rates, and will be able to tell you more about home equity lines of credit in Canada.

by: Bryan.J

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