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Line of Credit
A line of credit is a flexible arrangement for borrowing money through a bank, financial institution or other lender. Lines of credit may be secured with collateral, such as on a property or home, or they may be unsecured. Secured lines of credit generally have lower interest rates, while unsecured are attributed with higher rates.
Here are some commonplace lines of credit:
- Credit Cards
- Signature lines of credit
- Revolving lines of credit
- Home Equity Lines of Credit (HELOC)
Line of Credit Need-to-Knows
Interest paid on a line of credit is only charged on the amount of funds drawn, not on the amount of funds made accessible. For example, if a borrower qualifies for a $20,000 line of credit but only draws $5,000, interest would only be charged on the $5,000 sum withdrawn. Amounts can be drawn, paid back and re-drawn as many times as the borrower wishes, with no penalties for re-payment under most circumstances.
A home equity line of credit (HELOC) is a secured line of credit wherein the collateral is one's home. When a homeowner has amassed 20 per cent or greater equity in their home, they may apply for a home equity line of credit or a home line of credit mortgage. This enables homeowners to access equity funds built in their properties to use however they choose.
A line of credit mortgage can even be drawn toward the purchase of a second property. Line of credit mortgages are available from $10,000 to $500,000, depending on the value of the home or property from which they are secured on. Up to 80 per cent loan to value (LTV) can be made available through a home line of credit mortgage.
A line of credit may also be used to consolidate debts. Interest rates applied to a line of credit are generally much lower than those applied to a standard credit card. While interest rates on standard credit cards generally run 18 to 21 per cent, the interest rate on a home equity line of credit generally floats variably according to the current Bank of Canada prime rate.
A knowledgeable mortgage broker can help you to attain the right financing for you. Set-up fees will include a current appraisal of your home, mortgage loan insurance if applicable, and any closing or legal fees.