Monday, April 4, 2011

Is a HELOC right for you?


Home Equity Lines of Credit (or HELOCs) have become a popular way to borrow money at a lower cost than a credit card or line of credit. Because you're essentially borrowing from the equity you've built up in your home, you can do so at a much lower interest rate - with a lot more flexibility.
This has enticed many homeowners across the country to take advantage of this mortgage product - volume-wise, HELOCs have grown by 170% in the last 10 years, according to the Bank of Canada.
What many homeowners tend to lose sight of is that this product is still a form of credit - and still has the potential to turn into burdensome debt.
Because they don't require any principle payments, and you have the option of making interest-only payments, it's easily-accessible cash that requires little discipline.
So if you've been thinking of getting a HELOC, what precautions can you take to avoid falling down a slippery, debt-laden slope?
Here are a few tips:
1. Go in with a plan. Establish ahead of time what you will use your HELOC for and what you won't. Some uses, such as consolidating higher interest debts, are maybe more worthy of tapping into your home's equity. A vacation is something that should probably be saved up for.
2. Don't pull down too much. Deciding on a "magic number" amount is important as well. Start with the end in mind, and only pull down an amount that you can realistically pay off in two to five years.
3.Borrow from your home to improve your home. Your home is likely one of your biggest investments, so it's important to strategically decide how much of that hard-earned equity you want to sacrifice. Typically, using equity to improve the value of your home is always a good move - especially if you decide to sell it soon afterward, and can use the increased selling price to pay off your loan.
-Courtesy of Axiom Mortgage Partners

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