Think you own your home free and clear and without a mortgage? If you have a Secured Line of Credit (SLOC) also known as a Home Equity Line of Credit (HELOC), think again. SLOCs/HELOCs are registered against your property, just like a mortgage. However, unlike a standard mortgage, you’re typically only required to pay the interest every month, and thus the principal never decreases.
Rates on HELOCs are always variable rates at a minimum of Prime + 0.50% and often Prime + 1.00% + (4.45% as of today). If you know you are going to max out your line of credit or carry a balance long-term, you are doing yourself a disservice. A Variable Rate Mortgage (VRM) can be as low as Prime – 0.95% (2.5% as of today). We can look at transferring your HELOC to a VRM, saving you oodles of money and paying it down faster. Contact us today for a consultation.
We see it often. Young homebuyers are forced to need co-signers due to stringent qualification rules. They often turn to parents who are happy to help, only to find out a high-balance HELOC prevents them from doing so.
First time homebuyers Joanne and Jordan had diligently saved 20% for the down payment on their first home (this used to be the magic number for max borrowing power). However with the new qualification rules, they needed a co-signer to afford the home they wanted. Jordan’s parents seemed to be ideal co-signers but it turned out they had a $200,000 HELOC. Their minimum required interest-only monthly payments were only $652.98 however mortgage qualification rules force us to input a payment of $2500/month (1.25% of the balance). This meant they could not co-sign. We were able to switch them into a mortgage at 0.95% below Prime with a reasonable monthly payment, enabling them to co-sign and pay down this debt much more quickly.
We also see retired people on fixed income thinking they’re mortgage free, but saddled with large balance HELOCs, barely able to keep up with monthly payments. Contact us about the possibility of a reverse mortgage. You could be free and clear of payments for the rest of your life!
To re-cap, here are the pitfalls of a Line of Credit secured against your property:
- Higher Variable interest rates than standard mortgages
- Interest-only payments, never paying down principal
- Maxed out balances hurt credit scores
- Restricts ability to co-sign and to purchase other properties
- Rates and terms can change at any time *always read the fine print
We are consumer advocates and advise the best solutions for your individual needs. Contact us today, we can help.
Written by Jennifer Price