Owning a home is an ongoing commitment; new responsibilities and issues can arise at any time. A 2nd residential mortgage can help you to fund additional expenses and other financial needs as long as you have equity on your home.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.
Home equity lines of credit 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 two main types of home equity lines of credit: 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 home equity line of credit combined with a mortgage under their own brand name. It's also sometimes called a readvance able mortgage.
It combines a revolving home equity line of credit and a fixed term mortgage.
You usually have no fixed repayment amounts for a home equity line of credit. 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 home equity line of credit 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 home equity line of credit will go up to that credit limit as you pay down the principal on your mortgage.
The following example is for illustration purposes only. Say you've purchased a home for $400,000 and made an $80,000 down payment. Your mortgage balance owing is $320,000. The credit limit of your home equity line of credit will be fixed at a maximum of 65% of the purchase price or $260,000.
