HEL vs. HELOC - The Basics and What You Should Know

For many people facing a huge expense that cannot be avoided, using the equity in their home is a good way to raise funds. After all, your home is your biggest asset and you have made a substantial investment in it. What could be a better way to use the funds locked up in the home than to take a loan against it. There two ways in which Canadians can use the equity they have in their homes. You can take a home equity line of credit or a home equity loan Canada. There are some major differences between the two that you need to understand clearly before you sign up for either.

Home Equity Line of Credit

A home equity line of credit or HELOC is a simply a line of credit that you can draw against as and when you need funds. It is not a loan and the funds are not given to you at the beginning of the loan term.

Your bank or credit union may offer a HELOC to you, the terms of which will be based on your relationship with them. Generally the lending bank or credit union will specify the initial number of years when you can draw from the line. Once this withdrawal period ends, the repayment starts. Some HELOCs have to be repaid in full at this point of time. Others allow repayment in installments over a stipulated time frame.

Even during the initial withdrawal period, you will be charged maintenance fees on a regular basis, say, every month. This charge applies on your account even if you do not make any withdrawals at all. The maintenance fee is a fee charged by the bank for making the credit line available to you.

Home Equity Loan

A home equity loan Canada is a straightforward loan against your house property. You get the funds in a lump sum at the beginning of the loan term. You make repayments at periodic intervals as required by the loan agreement. Once you pay back the entire loan amount, the transaction is completed.

The home equity loan is based on the value of your home that you actually own. The paid up equity determines how much home equity loan you can now qualify for.

A HEL is typically a second mortgage and its lender has a secondary lien over your house in case you default. Any sale proceeds from your house will first fulfill obligations of primary lenders before the home equity lender gets to lay claim. This increases his risk in the loan when compared to the primary lender. This is why a HEL is usually more expensive than a first mortgage.

There is a risk on your home with these loans and this aspect needs to be kept in mind when taking a HELOC or home equity loan Canada. It is advisable to opt for this kind of loan only when you need to manage critical expenses such as medical treatment or necessary home repair.

For more information on home equity loans in Canada or a home equity line of credit, contact a mortgage broker at Canadian Mortgages Inc