Guest Post By: Penelope Graham, Zoocasa
Wishing you had the funds to give that outdated kitchen a facelift? Is the furnace unexpectedly on the fritz? Perhaps some un-routine household expenses have led to the depletion of your emergency fund – or worse, plunged you into debt.
Unexpected costs are part and parcel of being a homeowner, and can be especially acute for detached home dwellers (although, while greater maintenance peace of mind drives demand for condos and townhouses for sale, special assessments and other surprise fees can take their toll, too).
What’s a cash-strapped homeowner to do? While one popular way to access funds is to tap into the equity of your home via a Home Equity Line of Credit (HELOC), they’re not for everyone – putting your home on the line may be too great of a risk for some, while others simply may not have enough equity built up for a HELOC to be an option.
Taking out a consumer Line of Credit (LOC), however, presents a much more flexible approach. This loan type, which is reliant on the applicant’s credit score for qualification, combines aspects of both a HELOC and a credit card:
- A LoC can be taken out from any lender or credit union
- The debt is revolving
- Interest on the debt accrues and compounds over time
- The loan is set at a variable interest rate
The Benefits of an LoC
No use restrictions: The ability to use access LoC funds for any purpose is one of its greatest draws, whether homeowners wish to use it to fund a home improvement project, or even to consolidate existing debt.
Quick access: The fact that money can be accessed quickly is also attractive for many. Unlike extracting money through a HELOC, which requires the lender to assess the equity built up in the home – sometimes a lengthy process – taking money out of a LoC can happen as quickly as a few days; definitely helpful when the furnace breaks down and time is of the essence!
Comparatively priced: The interest rate on LoCs are variable, and tend to be much lower than that of a credit card, making them an overall more affordable borrowing method.
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There Are Risks for Homeowners
Interest adds up: Like any form of borrowing, however, LoCs aren’t risk-free, and using them incorrectly can be harmful to your credit score. Because the debt is revolving, meaning it doesn’t need to be paid back in full at any point in time, it can be tempting for homeowners to make only the minimum payment, and suffer the consequences of compounding interest.
Shop around: Not all LOCs are created the same – it’s important to do in-depth research when selecting the right LoC product, as lenders’ offerings can differ. Interest rates, specific terms and conditions, and late fee can vary from product to product.
Beware variable volatility: Lastly, because LoC interest rates are variable, they may go up or down during the lifetime of the debt. That’s because variable rate prices are tied to the Overnight Lending Rate set by the Bank of Canada – and it has been on an upward tear this year, which more hikes expected in 2019. For borrowers without a lot of wiggle room in their household budgets, fluctuating borrowing costs can be financially painful.
It’s important to take this volatility into account when taking out debt – or that surprise repair or renovation may end up costing you much more in the long run.
Penelope Graham is the Managing Editor of Zoocasa.com, a real estate website that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully across the nation, including houses, townhouses, and condos for sale in Toronto, Vancouver, and Ottawa. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.