One HELOC way to home eq­uity havoc

Us­ing the value of your home as line of credit has its pit­falls

Metro Canada (Vancouver) - - FINANCE - Kyle Prevost youn­gandthrifty.ca Kyle Prevost is a per­sonal fi­nance writer help­ing peo­ple save and in­vest at Youn­gandThrifty.ca.

What the heck is a HELOC?

The term HELOC refers to turn­ing your house into a gi­ant credit card with ex­tremely low in­ter­est rates. If you think that sounds like a good deal, you’re not alone.

HELOC is the acro­nym for a Home Eq­uity Line of Credit. Many lenders will al­low you to bor­row money against the worth of your house at a much lower in­ter­est rate than on your credit cards or if you were us­ing a line of credit that wasn’t “backed” by any­thing.

The idea is that banks and credit unions can safely as­sume lend­ing you money is rel­a­tively low risk be­cause you can al­ways sell your house to pay your debts.

Home eq­uity is ba­si­cally the dif­fer­ence be­tween what your house is worth and how much (if any­thing) you still owe on your mort­gage.

For ex­am­ple, if I pur­chased a home for $300,000, paid a $60,000 down pay­ment, and then faith­fully made my monthly pay­ments for 10 years, I might have whit­tled my mort­gage down to $165,000 or so. If my house was in an ice-cold hous­ing mar­ket and hadn’t risen in value at all dur­ing those 10 years, I would now have roughly $135,000 in home eq­uity.

If I lived in a ma­jor Cana­dian ur­ban cen­tre over the past 10 years, my home is now prob­a­bly worth at least 25 per cent more than I paid for it though; there­fore, I’d have more like $235,000 in home eq­uity. Therein lies the HELOC trap. As a Cana­dian mil­len­nial, I could be ex­cused for think­ing that the value of houses only goes up — and that it al­ways does so quite dras­ti­cally. If you fol­low that line of rea­son­ing to its log­i­cal con­clu­sion, there should be no harm in bor­row­ing against the grow­ing eq­uity in your home, be­cause as long as the value of the house goes up faster than you bor­row against it, things will be fine. Of course if in­ter­est rates sud­denly rise, home val­ues fall, and many other bad things hap­pen — you could be caught fi­nan­cially skinny dip­ping when the tide goes out.

Ac­cord­ing to the Cana­dian As­so­ci­a­tion of Ac­cred­ited Mort­gage Pro­fes­sion­als (CAAMP), 27 per cent of peo­ple with mort­gages in Canada in 2014 had a HELOC. Of those that had one, 90 per cent had an out­stand­ing bal­ance and the av­er­age amount out­stand­ing was $57,000.

HELOCs can be great fi­nan­cial tools if un­der­stood and used prop­erly. If they are sim­ply seen as the quick­est way to mar­ble coun­ter­tops, a new boat, or that lux­ury va­ca­tion you’ve al­ways wanted ... Well, just re­mem­ber, the tide al­ways goes out even­tu­ally.

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A home eq­uity line of credit or HELOC can make it all too easy to overex­tend your­self.

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