"I want to consolidate debt, but... do I use a Home Equity Line of Credit?"

It is hard to imagine decks and renovations when all you can see are snowdrifts, but the Canadian Spring mortgage season is upon us. One of the key products is the home equity line of credit (HELOC). This is a variable rate line of credit (LOC) that uses the equity in your home as collateral. The original purpose of a HELOC was for homeowners who were planning major renovations or additions and needed to make large payments but were not sure when the payment would be required. Over time the product’s use has evolved to become just another mortgage option.

The Good News

Typically, HELOC rates are lower than most credit card rates so using it to consolidate debt can save interest. If you use your HELOC for renovations on your home which increase its’ value, you can end up ahead of the game even when you include the cost of borrowing. Since this is a revolving credit as you pay down your balance you have access to additional funds up to your approved limit.

The Bad News

Remember financial institutions generate their income from the interest charged on loans. The biggest issue is related to low payments. Since the required payments are interest only the original loan amount may never get paid off. Additionally, HELOCs carry a variable interest rate meaning additional risk when interest rates increase. Carrying a traditional HELOC beyond your maximum earning years means it can become unaffordable as income levels decline. As the line is registered as a lien on your property – you have no additional borrowing power on the unused equity in your home. Anytime a homeowner wraps additional debt into a mortgage the time it takes to own their home is extended. Without realizing it your mortgage can become a trap and if anything happens and you can no longer make payments you are at risk of losing your home.

HELOC or Variable Rate Mortgage?

As your financial advocate, we provide products and services that not only fit your needs but also do not compromise your financial health. That’s why we are developing 2 new mortgage products; a Variable Rate Mortgage and a HELOC for the Spring 2011 mortgage season. The variable rate mortgage interest rate is tied to prime so payments fluctuate as rates change, allowing homeowners to benefit from low rates. The variable rate mortgage can be converted to a fixed rate product at any time without penalty. The HELOC is revolving credit with interest only payments and a fixed term of 5 years. Any remaining balance existing after five years converts to a traditional 5 year fixed term mortgage. Using this product means you get all the benefits of a HELOC, but have the peace of mind knowing if rates climb or you wish to establish regular principle payments you can convert to a fixed rate at no additional cost.

Should You Have a Variable Rate Mortgage or HELOC?

Variable rate mortgage products are for those homeowners who are less risk averse and are able to handle fluctuating mortgage payments. Any HELOC product is best suited for homeowners who are close to being mortgage free and need financing for a large purchase or renovation and are able to make large payments. Individuals with a HELOC must be diligent about making large payments and using available equity only when necessary.

Not Sure – Ask Your Financial Advocate

We approach the mortgage process a little differently – in fact we’re proud to say we’re backwards when it comes to mortgages. We ask you when you want to retire, when you want to be mortgage-free, and work backwards from there. We want to get you out of your mortgage as fast as possible. Lots of other financial institutions and mortgage brokers look at your mortgage based on what it does for their financial health, not what is best for you, your financial well being or your lifestyle. We don’t look at you that way – EVER. Your financial health is our priority, We C.U.™ to make sure you have the right mortgage product.