(NC)
Buying a new home is an exciting but often stressful experience.
The variety of financing options now offered by lenders is
overwhelming.
One of the most popular options is a home equity line of credit.
With interest rates typically lower than other forms of credit,
this line of credit can help you reach your financial goals.
However, there are several factors to consider when deciding if
this product is right for you.
Banks market home equity lines of credit under different names,
which might make it challenging to recognize when you are being
offered one. They are commonly combined with a regular term
mortgage in the form of a “readvanceable mortgage.”
When combined this way, the credit limit on your home equity line
of credit will often increase automatically as you pay down the
principal on your mortgage. A readvanceable mortgage may also tie
together other credit and banking products —such as personal loans,
credit cards and car loans — under a single credit limit.
Benefits of bundling these products together include convenience
and lower interest rates. But the downsides include fees and
restrictions if you want to switch to another lender, and variable
interest rates that could increase on short notice. Your financial
institution also has the right to demand that you pay the full
amount owing at any time.
When deciding if this lending product is right for you, remember
that your home is likely your biggest investment. You should beware
of overborrowing against its equity, especially if you're counting
on it to fund your retirement.
“Most lenders allow you to make interest-only payments on your home
equity line of credit, making it easier to delay repaying the
principal balance,” explains Lucie Tedesco, commissioner of the
Financial Consumer Agency of Canada. “Continually borrowing against
your home's equity without repaying the principal can jeopardize
your long-term financial security. For instance, in the event of a
housing market correction you might owe more than what your home is
worth.”
Ask yourself if a low interest rate and easy access to credit may
encourage you to spend more than you can afford to pay back. You
could find yourself in a debt spiral, using additional home equity
just to stay current on your mortgage. This could make you more
vulnerable to unforeseeable events, like job loss, illness or an
interest rate hike.
Consider creating your own plan to pay down the principal amount
borrowed over a fixed period. Aim to pay more than the minimum
payment or interest every month. With a home equity line of credit,
there is usually no penalty to pay back as much as you can at any
time.
Find more information online at canada.ca/money.
www.newscanada.com
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