Everything you need to know before applying for a home equity line of credit

Home equity line of credit or HELOC is an interesting way to get money on your homes’ value. HELOC allows consumers to borrow money at lower interests and use it for their purposes. The best part of taking HELOC is that you get access to funds once your loan is registered. So, you can straight away put it to use. Borrowers usually prefer HELOC as the rate of interest is significantly lower than that of other mortgage types. Besides that, HELOC offers its customers flexible repayment plans, which act as a relief for the customers. Also, it comes with a unique benefit where the borrower can use it, repaid and use it again buy only paying interest on the part of funds that has been used.  

What is HELOC? 

It is important to understand what exactly HELOC is before applying for it. HELOC is a line of credit secure by the equity in your home. HELOC allows the consumers to borrow money against the available equity of their homes. Equity in a home means the amount owed by the customer on their home should be less than the value of their home. Usually, the customers can only borrow up to 80% of the equity of their home. The lenders consider a few things before granting the money. These are the score of a credit card and its history, monthly income, and debts, amount remaining on the first mortgage, etc. The repayment system of HELOC works differently than that of a mortgage. It is not fixed like that in a mortgage and can vary according to the lender.

How is HELOC different than a Home Equity Loan?

Home Equity Loans and Home Equity Line of Credit are loans borrowed against the equity of the consumer’s home. And both the loans give a certain percentage of the equity of the borrower’s home as a loan, but there are a few key differences between the two. Home equity loans allow the customers to borrow money in lump sum amounts. This means that you can take home equity loans for big expenses. On the other hand, you can borrow money through HELOC in small amounts. Moreover, it allows you to keep borrowing money up to a certain period. It works like the credit card system. The other difference between the two is that, in Home equity loans, the rate of interest is fixed. While HELOCs have a variable rate of interest and the rate depends on the lender.

How A Line of Credit Works?

  • A line of credit is a kind of loan to borrow money up to a pre-set limit. You can use the funds of the line of credit for any purpose, and you don’t need to have a specific purpose for using the loan.
  • In Canada, a home equity line of credit is a safe credit where our house becomes collateral. Usually, the line of credit has a higher credit limit and lower interest rate.
  • In simple words, a line of credit is a kind of loan where we can borrow any amount of money. And we need to pay the interest on the amount we have borrowed. But we need to make regular payments on the mortgage principal and the interest.
  • The credit limit on the HELOC combined with a mortgage can be a maximum of up to sixty-five percent of our home’s purchase market value.
Risks OF Borrowing Home Equity Line of Credit:

All of us have heard about HELOC. It is a flexible, convenient, and low-cost way to borrow money. But there is a lot of risks involved in borrowing a home equity line of credit. So we need to be very careful while borrowing HELOC, and we should always know how to manage our HELOC prudently. Because if we remain careless while borrowing money from HELOC, it can become very expensive and put us into financial trouble. There is a risk of rising interest rates which ultimately affects the monthly payments and the total borrowings. And there is no way to predict when the price increase will happen or how much increase will be there. The only way to combat this risk is to pick a home equity loan with a fixed rate. Another troublesome situation that people face is fluctuating monthly payments, which can cause financial instability. Improper HELOC management can hamper our budget, due to which it becomes very difficult to make future financial plans. And in this case, we are unable to predict our monthly payments or the total borrowing costs. If you want to avoid these kinds of troubles, then you should pick a fixed-rate home equity loan option.

So then, what should homeowners use HELOC’S for?
  • Home renovation- Using HELOC funds for renovating our home can be a smart option. Because the loan borrowed from HELOC works like a credit card, you can do any renovation in your home without worrying about the money just by using the home equity loan. Home equity loans are approved by lenders who allow us to borrow a certain amount of money based on the equity of our project.
  • Paying high-interest debts– We can use the HELOC funds to clear our high-interest debts because the rate of interest on the home equity line of credit is considerably very low than those of our other loans. So, we can use the home equity line of credit funds to consolidate our high-interest debts. Doing so can help us in simplifying our payments and reducing the interest costs.
  • Paying for higher educational studies– If you are having a financial crisis and you cannot pay your child’s educational fees. Then applying for a home equity credit line can be the best option. You can borrow money through HELOC to make tuition payments when they are due, and you can pay the debt off over the set repayment time for your line of credit.
  • Cover Business Expenses- Home equity line of credit has lower interest rates. So, the Business owners can use the HELOC funds to cover their business expenses. Thus, you can also use the HELOC funds to start a new business of your own or to expand an existing business.

Ask Yourself the following Questions before borrowing a Home Equity Line of Credit:

Taking any loan is a big step, and you should make sure whether or not you are eligible to repay the loan before taking it. Here are a few questions that will help you to determine whether you should take the loan or not:
  • What do I need the loan for?
This is the most important question that you should ask yourself. The reason for taking the loan is very important. You must think about whether you need the loan or not. And if you need it, then whether you need small loans or huge amounts. Because you already know that HELOCs are better for a small loan. Answer these questions for yourself, and then choose the loan.  
  • Will I be able to afford the instalments?
You will get the approximate figure of your instalments from your lender. Once you know the figure, you should take a look at your salary and expenses and then decide whether you’ll be able to pay the instalments or not. Again, these are small but very important points as your house would be at stake here.  
  • What will be the rate of interest?
Usually, the rate of interest of HELOC is variable, and this might make some borrowers nervous. But you do not need to stress because the interest rate is always lower than the other personal loans. It would be best if you asked your provider how the rate would increase or decrease.  
  • Do I already have a credit card or any other debt?
If you are already in debt, then it is not advisable to borrow any more money. You have to be smart while taking home-based loans because your home is at risk in such cases. But if you fulfill all the conditions and need money, you should go with HELOC as it is an easy way to get money on your home’s equity.


HELOCs can be a good way to tap into home equity. And there are many advantages of HELOC, such as borrowing the amount according to your need, lower rates of interest, etc. But before borrowing money from anywhere, you should always be cautious and take certain measures.