Understanding a Home Equity Line of Credit - How it Differs From Other Conventional Loans

Because the home is essentially the most important asset of any person, using it as collateral to get a home equity line of credit should be done sparingly. Financial experts recommend that this should only be used for special items such as medical bills, education and major home improvement. Risking your home for foreclosure to borrow money that will be spent on your daily expenses is not a good idea.

How does a home equity line of credit work? How is it different from a mortgage - Toronto or elsewhere? Basically, a home equity line of credit is just like having a credit card. You have a credit limit and it's up to you on when you will "draw" that amount. This is one of the major differences of this financial option from other mortgages - Woodbridge or elsewhere.

In essence, in a home equity line of credit, the borrower is not given the entire amount of the loan upfront. Funds can be drawn anytime within the draw period - or in mortgage lingo, term.

Also, the interest rate of a home equity line of credit is variable. This means that the interest rate changes over time and such a change is dependent on certain market indices, such as the prime index.

How Repayment is Made

Repayment of a home equity line of credit is a bit interesting. You may opt to pay only the minimum amount required - this includes a portion of the principal plus interest. Other plans would allow you to pay only the interest during the "draw period." The trouble with this payment scheme is that at the end of the plan, you have to pay the principal in lump sum.

Also, paying only the minimum amount would mean that your payments may not be enough to cover the entire principal. This further means that at the end of the term, you are still obliged to pay a considerable amount of money. If in both cases you cannot fulfill your end of the bargain, then you run the risk of a foreclosure.

Therefore, it's a good idea to choose to pay more - more than the required minimum payment. This way, you are regularly paying off a portion of the principal. And at the end of the plan, you will only be paying a lesser amount to cover for the principal.

A home equity line of credit is an attractive financial option mainly because of its flexibility in terms of borrowing and repayment. Also, the interest paid in this kind of "loan" is tax-deductible in specific circumstances. More importantly, however, the appeal of a home equity line of credit stems from the fact that it builds on your image. Getting one doesn't obviously point out to the fact that you are in deep financial trouble - as in the case of a second mortgage.