As the new year dawns, the bills from holiday spending will start to roll in. If those are high-interest credit card bills, one option to help pay them off at a lower rate is to arrange a home equity line of credit (HELOC).
"Any line of credit, secured or unsecured, is really there for a revolving purpose," says Rob Hafer, regional manager of Invis on Vancouver Island. "If [the debt] is going to be long-term, you may be better off moving it into a one-year fixed or a variable-rate mortgage; typically, you're going to get a better interest rate."
A line of credit has some useful features, he says.
"It is open, [meaning] you can pay it out any time you want without paying a penalty."
For smaller debts, Mr. Helfer says an unsecured line of credit, even with a higher interest rate, may be better value.
"If you don't already have a HELOC, you're looking at costs of setting it up, maybe an appraisal, certainly legal fees," Mr. Hafer says. "It's probably not worth it, to borrow a small amount of money."
On top of the usual financial considerations of taking out any kind of loan or line of credit, it is important to be aware of the wider consequences of setting up a HELOC.
"You're putting your house directly in line to be subject to non-payment," says Ray Leclair, acting vice-president of public affairs for TitlePLUS. "When you borrow $100,000 to buy your house that mortgage will say 'This [house] is security for that $100,000.' Your collateral line of credit will say, 'This is security for any indebtedness that you owe to this financial institution; that's your line of credit, that's your credit card, your car loan, the loan you co-signed for your son/daughter."
The next loan you take out with that financial institution will also be secured by your HELOC, Mr. Leclair says. The existence of a HELOC will also affect your credit rating, whether or not you make use of the entire credit amount available.
"It's like having a credit card. If you say, 'I have zero balance,' on your credit rating they still count you as having a $500 payment a month," Mr. Leclair says.
When it comes time to sell, he adds, clients will often report that their home is mortgage-free, not realizing the HELOC is effectively a mortgage against the title of the home. The HELOC must be paid off before the property is sold.
"First of all we have to remove it, so we have to get a payment from them to pay off the line of credit," Mr. Leclair says. "They get stumped on closing because they were going to use those monies - and they are just not available anymore because they sold the asset and the bank says, 'I want the line of credit.' Now they also want the car loan that was attached to it and you weren't anticipating paying off the car. It's a domino effect."
So it may be worth keeping your your budget in check next Christmas, as well as doing due diligence on the methods used to pay for it all.
Read more: http://www.calgaryherald.com/business/real-estate/Making+your+mortgage+after+Christmas/5967690/story.html#ixzz1j06SKu9L