February 25, 2007, 11:04 am

The Home Equity Line of Credit

by: admin    Category: Types of Financial Products
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As mentioned in my previous article related to the mortgage, several products have been created throughout the years by financial institutions in order to meet all kinds of clients’ needs. On of them is the home equity line of credit (HELOC). This huge flex line could be a very interesting product if you master its characteristics. In order to do so, we offer an overview of this financial tool.

Definition

An HELOC is a flex line secured by a property. Financial institutions will grant a line of credit that can go up to 75% of the market value of your residence. In some cases, this amount can go even higher than 75%! The HELOC works the same way as a regular line of credit in term of rate and minimum payment. However, the amount granted is much higher.

Once you are approved, an appraiser will visit your property. He will make two kinds of calculations. One is based on the cost of rebuilding and the other is based on recent sales in the area. He will average both of them and provide the bank with a final value. Once this step is completed, the file is sent for registration and you will then sign the final paperwork.

Needs

The most common need for an HELOC is definitely to finance the purchase of a property. However, this mortgage offers more flexibility than any other types of loans. You can use it for renovation, buying a car, traveling and event to invest on the stock market. Since the granted amount is revolving, you have the option to withdraw up to the limit any time you want. Therefore, you can finance a variety of projects without going back to your banker everything.

Another interesting characteristic of this product is that it can be divided into more than one account. Each account has their number and credit limit. Therefore, you can easily separate your HELOC according to your needs and apply different payment on each payment.

Qualification

In order to qualify for an HELOC, several criterions will be looked at. The first one will be the TDSR. As it gives more flexibility than a regular mortgage, the HELOC requires a debt ratio lower than 40%. The credit rating represents an important factor also. Because an individual might end up with a three hundred thousand flex line, bankers are looking to people that are very diligent with their credit. Liquid assets as stocks and mutual fund can compensate for a higher debt ratio. Finally, the net worth will also play a role as it will show the client’s ability to manager his assets and to have them grow overtime.

Negotiation

Unless you are not approved for the full 75% of your property value, there is nothing much to negotiate. Interest rate will be at prime most of the time. In regards to the appraisal value, banks use accredited appraiser in which they have faith. They might increase the value by another 3% as a bigger increase would represent an unethical act for them.

In conclusion, the HELOC could be use for different projects and can also be included in financial strategies. Even if the flex line is secured, a good credit rating and TDSR will be necessary to qualify for. In the end, the HELOC could be an amazing product but will require self control and maturity in its usage.

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Comments

[…] ago. I paid 255K and put 25% cash down (that’s $63,5K). I’ve already setup my mortgage as an HELOC split into 3 accounts with variable limits. I pay 4% of interest charge (that is Prime – 2. I […]

by: ashishnaik1 | May 8th, 2007 (12:06 pm)

Can you pl. tell from which institute you get mortgage at Prime -2 ??

Thanks.
-Ashish

Sorry to disappoint you Ashish but as a banker, I have some benefits 😉 Actually, most HELOC are at Prime + 0.
MiKe!

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