HELOC vs Mortgage: What’s the Difference?

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HELOC vs Mortgage: What’s the Difference?

HELOC and mortgage, both are the loans that we get by keeping our house as collateral and if you don’t pay the amount in a certain time, eventually you lose your home. Both HELOC and mortgage loan have similarities and differences of their own, but you must research and know the details in order to choose the one that is right for you. As a consumer, you should know your circumstances and which option will suit better because you’ll get the value against your home and you can’t take a risk.

A mortgage is more commonly used loan in Canada, but many cases prove HELOCs to be a better option. Here is a detailed comparison of HELOCs to standard mortgage loans, let’s have a look.

An Introduction to HELOCs

HELOC, also known as a home equity line of credit, or simple home equity is a loan that you get against the home equity that you have paid for a real estate of your own. This can be taken against your primary residence. Each year, the popularity of HELOCs is growing among Canadians due to the many benefits that come with it.

It allows its consumers to get any amount while staying in their equity limit and keeping their account stable. It is a flexible process that allows customers to repay interest-only costs. HELOCs are usually second mortgages and can be used to refinance the existing mortgage. If you want to get HELOC as your first mortgage, it can save you a lot of money, but it is risky at the same time.

There is a specific ‘Draw Period’ and ‘Repayment Period’ while taking a HELOC. The draw period is the time that you can take to use the line, it can be five to ten years and the borrower can only pay interest. While the repayment period is the time in which the amount must be repaid. It can be ten to twenty years and the borrower must refinance within this period. If the borrower makes the payment at the discretion in the form of lump sums, they reduce the principle without any concern about paying a penalty.

There is no maturity date for HELOCs, and they are not amortized just like mortgages. HELOCs are proved to be very flexible as compared to a standard mortgage because they offer a lot of money options that you can borrow. HELOCs are the best choice if you need to pay your credit cards, college tuition fee, renovation of your home and other recurrent needs. It allows you to draw the payment that you need and pay interest on that par only.

Typical Mortgages

Traditional bank loans that people get for buying their home is called mortgage loan, the banks lend 80% of the loan and you must come up with the remaining 20% by your own. The mortgage interest rate can be fixed or variable according to the market rate, the money is repaid after a fixed time and it can be 15 or 30 years, this is a limitation as there are no options other than these two.

If you can’t keep up and provide the money on time, you can eventually lose your home and its ownership will shift to the lender. After this first mortgage, people can apply for a second loan against their property known as a home equity loan or HELOC.

Interest on HELOCs

The interest rates depend on the rates of Bank of Canada, as they go higher, the prime rates of other big banks are also raised. Due to these fluctuations, interest in HELOC is calculated every day. Interest for one day is 0.6% for a 6% HELOC, for a year it becomes 0.000164 multiplied by an average of what your daily balance is. Daily interest for $100,000 is $ 16.44, that becomes $493.15 per 30-day month and $509.59 per 31-day month.

And if we compare it to the traditional mortgage, 6% mortgage makes 0.005 into the loan balance. Let’s say the balance is 100,000, the interest will be $500 per month, and it does not matter if the moth has 28, 30 or 31 days.

A mortgage is usually offered in both fixed and variable interest rate and usually fixed one is considered by most Canadians as it is easier if the fluctuations in interest rate will not affect you. If you are going for a HELOC, it’s a must to read all the instructions carefully so you don’t miss any point that can be a problem later.

Best HELOC Rates

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HELOC Loan Limits – Home Equity Line Of Credit

As fixed by the Canadian government, mortgage, and HELOC combined cannot go above the limit of 65% LTV (Loan to Value) if it is your primary loan. But if you’ve borrowed the HELOC as your second mortgage, the Loan to value (LTV) can be increased to 80%. When the principal on the mortgage will the paid, the home equity will eventually raise. LTV can also be increased if the value of your house increases by good marketing strategies. These aspects can offer extra credit access to the consumer.

The Right Financial Strategy

When you are confused between HELOC and mortgage, a HELOC is proved to be the better option if the right financial strategy is applied. HELOC, due to its flexibility, is the best option for people who intend to buy a property as an investment for a specific time and plan for its sale after its value raises.

But in case you are getting your very first house, you must consider getting a traditional mortgage because it is more suitable for new buyers. Consumers who plan to withdraw a large amount of money at one time may consider HELOC as it can be converted into a fixed-rate loan.

There are many advantages associated with a HELOC, but in different situations, a conventional mortgage can be better so it depends on your circumstances that which one will you choose. Something with many benefits can be a pitfall if you have not done your research properly. All you must do is complete your exploration and make the right choice.

By using a mortgage agent or mortgage broker from Citadel Mortgages, you will be able to ask all the questions you have and be ensured you get the best advice and mortgage product for your mortgage needs. Contact Citadel Mortgages to become mortgage and debt-free sooner!

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