Thanks! I think there’s some key “point” that we’re missing after watching as many YT videos we can shake a stick at. How is one paid off? How is it measured? – thanks good people
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your house might be worth 500k; and you have paid off 300k of that; giving you 300k equity in your home.
you can go to the bank and say “using this house as collateral, can you give us a line of credit”
the bank will then run some calculations and say “we have reviewd the property and your financial history; if you agree to our terms we will loan you some money”
the loan might have an interest rate of 10% or higher
failure to repay the loan might mean losing your house
consider the HELOC an additional credit card payment or another mortgage payment to be made
The key points of a HELOC are 1 – by putting your home up as collateral you can get a lower interest rate compared to a typical line of credit or credit card, and 2 – you can get a very large amount of credit based on how much equity you have. Generally banks would allow you to carry up to 80% of your homes value between your HELOC and your primary mortgage. In Canada, where you renew your mortgage every 5 years, you also can typically roll your HELOC balance into your mortgage at renewal. Not saying that is a good idea, but it’s a thing people do.
Think of it like another credit card. You can take (borrow) money out of it. You have a credit limit (equity), you have an interest rate, you have a monthly payment (based on the amount you borrow + interest). The interest rate is variable, but much lower than a credit card (which can be 20%+). Credit cards give you a ~30 day grace period, but interest is always calculated on a HELOC.
Normally when you buy a home, you pay some amount of the home as a “down payment” and a bank covers the rest of it (which is your mortgage) that you pay back over time, so that as time progresses you own a larger and larger portion of the house
HELOC works by letting you borrow against the portion that you already own – this the “home equity”. It’s usually capped at whatever equity you have in the home.
It’s called a “line of credit” because it doesn’t have a fixed amount or term – you can withdraw as much as you need (up to the limit) and pay back as much as you want. So if the heater breaks and you suddenly need $10k, you can use the HELOC for that, and pay it all back next month or make the minimum payment and spend years paying it back.
It’s a tool for people who have owned their homes for awhile to borrow money under favorable terms, usually for use on house repairs and upgrades. It’s a good interest rate because it’s low risk for the bank – they already own your house thanks to the mortgage.
Here’s an example – you buy a $500k house and put $100k down (so you borrow $400k)
By year 10, you have paid off $150k of the mortgage. So you have $250) in equity and owe the bank $250k.
The bank says, ok, I can loan you up to $150k and use the house as collateral for that, since I was originally OK loaning you $400k. If you don’t pay it back, the bank can foreclose on your house, just like the mortgage.
You generally can’t qualify for a HELOC until you’ve paid off a fair amount of the house – the bank doesn’t want to lend you more than the original mortgage amount (mostly because foreclosure is a pain and likely results in a reduced sale price, so they don’t want to lend you $500k for a $500k house and then be stuck selling it for $450k if you skip town – thus the 20% conventional down payment for favorable mortgage terms). so you can’t put $100k down on the $500k house then immediately take out a $100k HELOC to pay yourself back.
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