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Understanding HELOC Fees
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If you own your home, you may be able to use it to gain access to funds needed to cover large expenses. While home equity loans are a great option, you may also want to consider a different version of this loan, a HELOC.
More properly referred to as a home equity line of credit, a HELOC can provide you with a way to access the equity in your home to be used to pay for large expenses or even to consolidate debt. Let’s take a look a deeper look at HELOCs including the fees associated with them.
What Is a HELOC?
A HELOC is a type of financing that uses your home’s equity as security. Since it is a line of credit, it works similarly to how a credit card functions. Rather than being given a lump sum of money as would be the case with a traditional loan, you would have access to a certain credit limit, like a credit card. You can withdraw as little or as much as you want from your HELOC account, which can be accessed anytime the need for additional money arises, as long as you do not exceed the limit you are approved for.
HELOCs are considered revolving credit lines whereby your home is used as collateral in case you are unable to repay any withdrawn funds. Like credit cards, you are only charged interest on the amount of money you withdraw, rather than on the entire credit limit amount. So, if you are approved for a $50,000 HELOC and only withdraw $10,000, you will only be charged interest on that $10,000.
How Does a HELOC Work?
When you’re approved for a HELOC, you may be given a HELOC account card or checks that can be used with your HELOC line. HELOCs come with different terms and time frames during which you are allowed to have access to funds from your home’s equity. Some HELOCs may allow you to use the credit line for years without the need to repay the principal, while others may require the principal to be repaid much sooner.
For instance, you may be given access to withdraw funds as often as you need over a 10-year draw period, which means you have 10 years to use funds from your HELOC without having to repay the principal. Instead, you would pay the interest on the balance. Once that 10-year period expires, you will have to pay the principal amount back over a certain period of time, along with any interest accrued.
You may apply for a new HELOC in order to keep your credit line open and avoid repaying the full amount after a certain time frame.
How Much Money Can You Borrow Using a HELOC?
The amount of money that you can borrow through a HELOC will depend on how much equity you have in your home and what your home is currently appraised at. Your equity is what you actually own in your home after your current outstanding loan is deducted from your home’s value. For instance, if your home is worth $600,000 and you still owe $200,000 on your mortgage, you have $400,000 in equity.
In Canada, HELOCs can be up to 80% of the value of your home. Considering this, you could borrow up to $480,000 based on the example above. Since you still owe $200,000, you could borrow the remaining $280,000 in equity.
What is a HELOC Used For?
A HELOC can be used for anything that you need to financially cover at your discretion. Having said that, many homeowners take out a HELOC as a way to consolidate higher-interest rate debt, such as credit cards, which are notorious for having sky-high interest rates.
If you currently carry a significant amount of credit card debt that is accumulating interest charges month after month, you may be able to use a HELOC to pay off that debt. This makes sense if the interest rate you are charged in your HELOC is much lower than that of your credit card. In this way, you can save a lot of money in interest payments and be better able to pay off that outstanding debt faster.
How Do You Qualify For a HELOC?
In order to qualify for a HELOC, you will require a minimum equity or down payment of 20%. If you want to use a stand-alone HELOC to substitute your mortgage, you will need a minimum equity or down payment of 35%. Like other loan types, you will also need a decent credit score (usually anywhere between 650 to 680), sufficient income to support payments, and manageable debt loads that do not take up much of your current income. Your lender will want to see proof of all of these factors before you will be approved for a HELOC.
If you are applying for a HELOC with a federally-regulated bank, you may be subject to a mortgage stress test, which will test whether or not you would be able to continue payments in the event that interest rates rise in the near future. Right now, this means you will have to qualify for the Bank of Canada’s five-year interest rate or the interest rate your lender offers you, plus 2%.
Once you are approved, you can access funds from your HELOC whenever you need to.
What Fees Are Involved With a HELOC?
A HELOC can be a great financing option for Canadian consumers who own a house and who are looking for additional cash to cover a large expense or to consolidate debt. But as with any type of financial product there are fees that much be paid when you take on a HELOC. It’s important to understand what these fees are and how they might affect the overall cost of your HELCO so you can decide whether or not it is the best option for you. Here are the most common fees associated with a HELOC in Canada.
This is the cost of setting up your HELOC, it covers the time it took to do the paper as well as other similar administrative duties. Typically, this fee will range from $100-$200.
Loan Origination Fee
This is a one time fee that most lenders charge to process a new loan. The cost will depend on the value of your HELOC, although a good frame of reference is between 0.5% and 1% of the loan.
In order to have your loan documents registered, you will need to employ a lawyer. Most banks will have an inhouse lawyer you can use. Employing a lawyer, even for a couple of hours, is expensive so expect to pay up to $1,500.
A HELOC is based on the equity you have built up, your lender will need to know the exact value of your house in order to properly calculate your equity. You will need to pay for an appraisal of your house to determine it’s real value. Hiring a professional appraiser can cost anywhere from $250 to $500.
Once you’re done with your HELOC and have paid it off in full you will likely need to pay a discharge fee. Expect to pay a fee of anywhere between $200 and $350.
Similar to a mortgage, you will be responsible for the closing costs when you take on a HELOC. These can range from $200 to $350+.
While you may not need to worry about an inactivity or maintenance fee depending on the lender you’re working with, it is still important to consider. The cost of this fee also varies depending on the lender.
Withdrawal, Balance, Transaction Fees
Most HELOC come with withdrawal, balance, or transaction fees. This means you may be charge a fee every time you withdraw from your account or if you don’t maintain a certain balance.
Crunch the numbers with your lender to find out exactly how much your HELOC will cost you before applying for one to make sure you’re financially capable of handling this additional debt.
How To Apply For a HELOC
To apply for a HELOC, you’ll first want to make sure you have enough equity in your home to get approved. You’ll also want to check your credit score to make sure it’s high enough for approval. If not, you may want to take steps to improve it first before applying for a HELOC, or any other type of loan.
Gather all the pertinent documentation that your lender will likely want to see and assess before you apply in order to ensure a more seamless process. Common documents that you may need include pay stubs, tax receipts, bank statements, debt statements, and so forth. Be sure to fill out the application form in full and ensure no errors when applying.
A HELOC can be a convenient way to access funds without having to repeatedly apply for loans when the need for extra cash comes up. You can withdraw as much or as little as you want, and you don’t have to worry about paying interest on the full credit amount like you would with a home equity mortgage. That said, be sure to use the money wisely, as you are still obligated to pay whatever you withdraw back, plus interest. If you’re interested in being matched with a lender who offers home equity products, Loans Canada can help.
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