Hello World! Welcome Friends! The CBC news in January 2019 reported that over three million Canadian homeowners have HELOC, but about half of this population don’t know how it operates. It was disheartening news because about 1.5 million people are in debt that can make them lose their house, and they do not know how to use the loan available to them. Many homeowners in Canada have accrued debts, but because they do not understand loans gotten through home equity, they let their debts consume them. This article will help provide clarity on HELOC and provide you with a guide to get a HELOC.
HELOC: What Is It?
HELOC signifies Home Equity Line of Credit. It is popularly known as an efficient way to finance substantial projects by using your home as collateral. A HELOC is a line of credit that functions similarly to a credit card; the lender sets a maximum limit of funds that can be accessed using the line. The maximum limit is dependent on your home equity; in Canada, a borrower can borrow up to 65% of the property value through HELOC. It is necessary to know that in Canada, you can obtain a HELOC even without a mortgage, it is called a stand-alone HELOC.
Its operation involves a draw period and a repayment period; during the draw period, a borrower has access to withdraw whatever amount they have at any frequency within the limit of the credit line. The draw period can last for five to ten years, after which you cannot withdraw money again, and repayment of the accumulated loan starts. Because of the flexibility of HELOC, it is a good loan plan for home renovation and repair, emergency funds, investments, and debt consolidation.
Guide to Getting a HELOC
1. Identify your Needs
It is necessary to be able to specifically identify what you need funds for before taking a HELOC. Using HELOC for profitable investment is a sensible need because there is a good chance of repaying. But once the needs are more of a luxury than essentials, you should reconsider taking a loan.
2. Carry Out a Financial Review
After determining what you need a loan for and weighing if it is worthwhile, the next step is to review your financial status. Every lender will do a financial review before approving a HELOC, so you need to do one personally. Check if you meet the criteria for a HELOC, which includes; a good credit score, proof of sufficient and stable income, and a reasonable level of debt compared to your income. In Canada, to be approved for HELOC, you should have a minimum down payment or equity of 20% or 35% for a stand-alone HELOC.
3. Determine the Home Equity
You should calculate your home equity to determine if you qualify for a HELOC. The calculation is done by knowing the current market value of your house and subtracting all your remaining mortgage loans from it. The figure should be at least 20% of your home value to qualify for a HELOC. Some lenders might make an exception, but it is better to be safe by aiming above 20%. If the figure is less than 20%, you can work to increase it by paying down debts and improving your debt-to-income ratio.
4. Look for Lenders
Once you are sure that you can qualify for a HELOC, the next step is to look for the best fit lender. Lenders usually have different qualification requirements and interest rates, so it is advisable to compare three or more lenders’ rates and use them to negotiate better terms. You should ask the lenders for the notice duration before any interest increment and their additional costs. The additional fee usually includes valuation, legal, title search, administration, credit insurance, and cancellation fee. Opt for a lender that offers a fair rate, fees, and terms.
5. Apply for HELOC
After choosing a lender, you’ll need to apply with additional financial documents. The lender will ask for your personal and employer’s information, income documentation of two years, evidence of homeownership, house insurance, and mortgage statements, and documents relating to existing debts. The application can be carried out online, in a bank, or at a loan specialist office.
6. Review All Disclosures
It is a necessary step to avoid any financial or legal issues. After applying for a HELOC, you will receive disclosure documents from your lender. They state all the agreement terms and additional requirements. No matter how wordy it might seem, review the disclosures carefully and ask your lender questions for clarity. It is the final opportunity to ensure that the HELOC arrangement is to your desire and you have a clear understanding of the loan operations and conditions.
7. Underwriting or Appraisal Process
This process can last for a few hours or several weeks, and it requires little activity from you. This step involves the lender accessing your home’s current value and determining how much equity you have available. The lender might need to visit your home in person.
8. Sign all Closing Paperwork
It is the final step that involves you and the lender. After the appraisal, the lender will inform you if you’ve received final approval and schedule a closing date for signing paperwork. It is necessary to review all the paperwork carefully before signing. Once you sign all the closing paperwork, you’ll have access to the loan within a few working days.
9. Make a Plan to Use the HELOC
Once you’ve got access to the funds, it will be unwise to start withdrawing without making a plan. Since you’ve established the need for the loan, the next step is to fix a personal credit limit in line with your repayment schedule. The credit limit is necessary because you are only required to repay the funds you withdraw and not all the funds made available to you, so you don’t have to spend all the money on your credit line if the need doesn’t arise.
Always remember that HELOC is a debt; if not utilized wisely, you might end up in more debt than you anticipated or even lose your house. If you are unsure about any step in getting a HELOC or you feel you can’t do it alone, you can seek assistance from a financial and mortgage consultant. You can also follow this link on consultations and help with your HELOC plans.
Click the links below for any posts you have missed:
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Planning for the Future: How To Save Safely
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Toodles,
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