HELOC
A home equity line of credit (HELOC) is a secured form of credit. The lender uses your home as a guarantee that you’ll pay back the money you borrow.
HELOCs are revolving credit. You can borrow money, pay it back, and borrow it again, up to a maximum credit limit.
Types of home equity lines of credit
There are 2 main types of HELOCs: one that’s combined with a mortgage, and one that’s a stand-alone product.
Home equity line of credit combined with a mortgage
Most major financial institutions offer a HELOC combined with a mortgage under their own brand name. It’s also sometimes called a re-advanceable mortgage.It combines a revolving HELOC and a fixed term mortgage.
You usually have no fixed repayment amounts for a HELOC. Your lender will generally only require you to pay interest on the money you use.
The fixed term mortgage will have an amortization period. You have to make regular payments on the mortgage principal and interest based on a schedule.
The credit limit on a HELOC combined with a mortgage can be a maximum of 65% of your home’s purchase price or market value. The amount of credit available in the HELOC will go up to that credit limit as you pay down the principal on your mortgage.
Buying a home with a home equity line of credit combined with a mortgage
You can finance part of your home purchase with your HELOC, and part with the fixed term mortgage. You can decide with your lender how to use these two portions to finance your home purchase.
You need a 20% down payment or 20% equity in your home. You’ll need a higher down payment or more equity if you want to finance your home with just a HELOC. The portion of your home that you can finance with your HELOC can’t be greater than 65% of its purchase price or market value. You can finance your home up to 80% of its purchase price or market value, but the remaining amount above 65% must be on a fixed term mortgage.
For example, you purchase a home for $400,000, make an $80,000 down payment and your mortgage balance owing is $320,000. The maximum you’d be allowed to finance with your HELOC is $260,000 ($400,000 x 65%). The remaining $60,000 ($320,000 – $260,000) needs to be financed with a fixed term mortgage.