Home Equity Loan Vs. Home Equity Line of Credit (HELOC)
Contrary to popular belief, a Home Equity Loan is NOT the same as a Home Equity Line of Credit or HELOC for short. The name is almost the same so what’s the difference?
A Home Equity Loan is a mortgage registered against your home with a maximum loan to value of 75%. Qualification for this mortgage type is heavily based on the property type (ex. single family home, town home, condo), location, condition, and available equity. Banks and credit unions no longer offer traditional Home Equity Loans. Private lenders who do offer equity mortgages do not put as much emphasis on your income, credit, or debts. Higher interest rates and fees will be applied in exchange for the relaxed qualifying guidelines.
Please read “How Much Does A Home Equity Loan Cost” for more details on set-up fees.
A HELOC is a re-advanceable Line of Credit that is registered against your home just like a mortgage. Legally, the maximum loan to value is 65%. For example, if your home was valued at $500k, the maximum HELOC limit could be $325k which is 65% of $500k.
A major difference and point of confusion in comparison to a Home Equity Loan, is how you qualify for a HELOC. Banks and credit unions are required to follow strict lending policies which include scrutinizing income, sources of income, debt load, credit history, as well as type, location, and condition of your home. The documentation is intensive and the process can take 4+ weeks. In addition, you must qualify under the Stress Test and prove that your income can support the total HELOC balance as if it were fully drawn. The Stress Test is a government policy which states that you must qualify 2% points above the contract rate. Let’s say the HELOC rate is going to be 4.5%. Your income to debt ratios under the Stress Test needs to support a hypothetical rate of 6.5%. This is a measure put into place to protect Candadians against the risk of rising interest rates in future.
The bottom line is that the HELOC is cannot be approved simply based on your available equity.
Though it is certainly more challenging to qualify for a HELOC, the benefits can be worth it. Perks include cheaper interest rates, no lender or brokerage fees, and continued access to the HELOC even after paying off the balance. It’s basically a credit card for your home.
Quick Comparison Guide
|Attributes||Home Equity Loan||HELOC|
|Qualification requirements||Heavily based on the available equity||Qualified based on income, debt, credit, and property.|
|Maximum Loan to Value||75%||65%|
|Set up costs||2%+ of loan amount||$1500 average|
|Penalties for early payout||No (most cases)||No|
|Application time||2 weeks average||4-8 weeks average|
If you have any questions about this article or are contemplating a Home Equity Loan or Home Equity Line of Credit, please give us a call and we’d be happy to help.