A look at lines of credit

So there are vast arrays of financial products available for you. One of the more common is the line of credit or LOC for expediencies sake. Like most things it is neither good nor bad but let’s take a minute to have a closer look anyway, shall we?

There are two types of lines of credit. The first is a home equity line of credit. It is important to note that this is in fact a type of mortgage. Your lender has taken the time to assess your home’s value and then has a lawyer register this against your home through the Alberta title system. This type of mortgage allows for great flexibility. You can pay it down as quickly as possible without penalty. You can also access the funds again should you have the need. The money can be used for whatever you like. And best of all you can make interest only payments which can be great for your overall cash flow. But as a well-known superhero says, “With great power comes great responsibility.” If you make interest only payments for the life of your mortgage, you will always owe the entire original amount. This product can be very insidious and needs to be managed carefully. It would be horrible to realize in 25 years that you still owe the lender the full amount.

The majority of lenders have had to comply with recent government policy changes and now are only able to offer up to 65% of your home’s value for the LOC. Your local credit unions and a few others are still able to offer up to 80%.

The other type of LOC is an unsecured product. With this one, you go to your bank and if your credit history is strong, they may give you a LOC. You are still able to use the funds for anything you need. Interest rates are often better than those available on a credit card. It can be a great tool for life’s bigger expenses such as a new furnace. Many lenders will still even allow you to use the LOC for the down payment on your new home. But the LOC can also work against you. First of all, you have to be disciplined enough to repay more than the interest only payments the lender will require. Set your repayment amount to 3% of the balance and you will be on the right track. As a part of the rule changes mentioned previously, we now have to calculate 3% as the monthly payment when qualifying you for a mortgage so carrying a high balance can hinder you come time to purchase a new home.

Use the LOC wisely. That’s all.

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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