What is HELOC?
HELOC is a home equity line of credit. It's a revolving line of credit that is secured against your home.
Home equity is the market value of your home minus the outstanding mortgage amount and/or other loans and lines secured against it.
If your home appraised value is $700,000 and your outstanding home loan balance is $200,000, your home equity is $500,000.
There are several types of home equity loans: a traditional mortgage, a home equity line of credit, and a reverse mortgage.
A traditional mortgage is a first, second, and other debt secured by your property. A lender offers this home equity loan as a lump sum payment with a fixed repayment period and fixed monthly payment.
With a line of credit, borrowing is an ongoing process: borrow, pay back, and borrow again, up to your maximum credit limit, anytime without a prepayment penalty.
During a HELOC application process, the lender determines the available credit amount and uses your home to guarantee you'll pay back the borrowing money.
The interest rate is variable and depends on the lender's prime rate. Therefore, it could help to save money. However, it's more complicated to calculate the variable rates than the fixed rate.
There are two main types of Canadian home equity line of credit:
Definite Term HELOC
It has a pre-decided maturity period, further divided into two parts: the draw period and the amortization period. A homeowner can draw money from the credit line during the draw period. Usually, it lasts for three to ten years.
Within this period, the borrower may make only interest payments on the outstanding home loan balance; principal repayment is not necessarily required. However, your minimum monthly payment can change as your exceptional balance changes. As you make a payment, your available credit increases by the amount of the payment that went toward the principal balance.
When the draw period ends, the borrower can not take a credit line from HELOC or second mortgage — the repayment period begins.
The next period is the amortization period, in which the home owner’s credit liability is amortized over the remaining term (from five to fifteen years). During this period, the borrower should also make interest and principal payments.
Indefinite Term HELOC
This type of HELOC can last indefinitely, and there is no specific difference between a draw and a repayment period. It looks like a credit card, where the credit is drawn, revolved, and repaid on demand. A credit limit limits the credit draws, and you can not withdraw money from the credit line beyond the HELOC limit.
You have different repayment options: make interest payments or repay the principal amounts whenever you like without any prepayment penalties. The interest is charged on the outstanding loan balance. Most lenders in Canada offer indefinite-term HELOCs.
Fees may vary between home equity lines of credit.
Some typical fees are:
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A home appraisal or valuation fees: the fee is charged to assess your home’s value;
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Legal fees: the fee to register the collateral charge on your home;
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Title search fees: another legal fee to ensure there are no liens on your home;
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Administration fees: the fee charged by a lender to make and maintain your account;
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Credit insurance fees: different types of insurance, which are usually optional: life, critical illness, disability, and job loss insurance;
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Discharge or cancellation fees: this fee is charged if you cancel your home equity line of credit and remove the collateral charge from the title of your home. An early closure fee may be charged if you close your HELOC within a few years of opening. A minimum balance or minimum draw could be required at closing.
To qualify, a HELOC applicant must:
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Be a homeowner
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Have a good credit score (620 — 740+) for a basic line of credit
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Have a proven stable income
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Debt to income ratio of about 40 — 50% of your gross monthly income
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The remaining equity in your home is at least 20%
In general, the more equity you have in your home, the more amount of HELOC you can qualify for.
What is a HELOC calculator?
When you apply for a HELOC, the lender decides on your loan amount. But you can calculate the amount by yourself in advance with the assistance of a HELOC Calculator.
Reference! The home equity line of credit calculator is a type of financial calculator designed to make your loan calculations easy and fast.
A home equity calculator helps to find out how much equity is in your home before deciding to apply for a home equity loan or HELOC.
If you borrow money from a bank in Canada, a HELOC could not exceed 65% of your home's appraised value. It is called LTV — loan to value ratio; it is the maximum amount, in a percentage, that your bank or another lender could allow you to borrow compared to your home’s value.
You can get a mortgage plus a HELOC loan as well. It may be up to 80% of your home equity — the maximum loan-to-value ratio in Canada.
To find out a HELOC amount:
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First, input the data in the online form.
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the home's current appraised value (the amount of money that you think your home is worth);
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the outstanding home loans total (total amount of all existing loans secured by your home).
If your home is worth $700,000 and you have a mortgage for $200,000, your line of credit may be up to $200,000.
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Some calculators let you fill in your credit rate or change the maximum loan to value ratio limit from standard 80% to what your lender offers to get.
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Click the «Calculate» button.
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Review your amount value, table, and chart. You can find detailed calculation results in the online or pdf report.
Typically by changing any value in the online form fields, the calculated values immediately appear for displayed output values.
However, your HELOC limit, monthly payment, and other terms and conditions could be different as the lender may use its algorithm of calculation and evaluation criteria.
The formula to calculate the HELOC amount in total outstanding home loan balances is:
Home Value x LTV% - Mortgage Balance = HELOC Amount
Using the home equity line of credit calculator, you can save money and easily consider how your HELOC amount will change if you raise your property value or pay off the home loan's balance at first.
Home equity loans vs. HELOCs
Home equity line of credits and home equity loans use your home as collateral and are considered second mortgages.
A home equity loan is a one-time loan secured by your home. It can be up to 80% of your home’s value. The lender provides you with a lump sum of money upfront.
Line of credit gives you ongoing access to cash when needed with any frequency. Its amount could be as much as 65% of home equity. You only make payments when you owe money and have to make at least interest payments.
Unlike HELOC, any home equity loan as a traditional second mortgage isn't a revolving line of credit, which allows you to borrow and pay according to your repayment schedule. In addition, a mortgage has an amortization period that HELOCs in Canada typically do not have.
You must make regular fixed mortgage payments on your home equity loan that cover principal and interest every payment period according to your fixed schedule. And there are fees, insurance, and services costs, which could be included in the home loan cost or paid upfront.
The borrowing rate you could apply for generally depends on your credit score and income. For a home equity loan, the interest rate is usually a fixed rate — it does not change during the life of a loan.
The HELOC's interest rate is variable. It means that the rate changes in accordance with the Canadian prime rate. Usually, its interest rates are the lowest among different lending solutions in Canada. However, the appraisal, legal, additional fees, and closing costs may vary.
A home equity line of credit gives some options that borrowers couldn't have access to with a home equity loan. For example, a home equity line of credit could be used to improve an existing asset to generate wealth.
For example, if you borrow money for home renovations, the profit from the improvements could be more than the amount paid on the interest rate of the home equity line of credit. It is specifically true for home selling.
It also will work effectively if you use it for debt consolidation or are financing something long-term, for instance, a student loan. The interest rate on the home equity line of credit may be lower than a regular student loan.
To compare the line of credit and home equity loan lending options, borrowers should carefully consider monthly payments, fees, and interest rates.
How to calculate payments on a HELOC?
Manually
To calculate your home equity line of monthly credit payment using the formula:
HELOC Balance × Interest Rate / 12 months = Minimum Interest-Only payment
Using a calculator
The HELOC payment calculator lets you compute payments easily and quickly.
Input your HELOC amount and interest rate. For example, you want to borrow $200,000 with 4,45%. Your interest-only payments will be $724 monthly.
Note: you need to pay more to settle up your loan in the future.
You may use the HELOC Payoff Calculator to find out how much you should pay. Input your home equity line of credit amount, interest rate, and payoff loan term in months.
Let's look at the same example: the loan amount is $200,000 with a 4,45% interest rate. So if you want to pay it back for 60 months, your monthly payments should be $3,724.
You could pay back the principal borrowed amount in full at any time.
You may see that it's much more than minimum interest-only payments. So be careful when applying for a HELOC; take it only when you need it.
The calculator may help you evaluate your budget and loan options and consider if the line of credit suits your financial needs and goals.
Comparing lenders with a HELOC calculator
A home equity line of credit calculator usually provides the feature to compare home equity rates.
You can find a lender with the best rate or choose between different HELOCs listed in a table. You can fill in your desired loan amount and your home appraised value, outstanding mortgage balance, loan term plus, sometimes, credit rate to find a suitable lending offer.
