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HELOC vs. Cash-Out Mortgages: Which Is Right for You?

If you’d like to have some cash on hand for renovations, travel or paying off debts, why not take
advantage of the equity you have in your home? After all, you’ve put your hard-earned money into your
property for years; you deserve to benefit from your investment.
The Wilson Team of Mortgage Specialists will work with you to decide whether a home interest line of
credit (HELOC) or a cash-out mortgage is best for your needs; then, we’ll help you to get the ball rolling.
What is a HELOC?
A home equity line of credit, or HELOC, is a secured form of credit that uses your home as a guarantee
that you’ll pay back the money you borrow. It is a revolving line of credit that is unrelated to your
mortgage. It allows you to borrow money up to your approved limit, pay it back and borrow again. The
maximum credit allowed is 65 per cent of the purchase price or market value of your home at the time
you are approved for the HELOC.
HELOCs have a draw period during which you can access the money that has been approved for you and
a repayment period, during which you must repay the principal and interest accrued. Yes, interest: a
HELOC works like a credit card. Each time you withdraw funds, you must pay them back with interest –
and that interest rate can be variable. Generally, minimum monthly payments are required once you
borrow money.
The term for a HELOC varies, depending on the lender; some can last up to 30 years with a 10-year draw
period and a 20-year repayment period. The Wilson Team can help you find the most advantageous
terms.
Remember, you are using your home as collateral, so failure to make payments could result in the loss
of your home, so discipline is essential.
What is a Cash-Out Mortgage?
A cash-out mortgage refers to a new mortgage that pays off your existing mortgage and provides
additional cash that you can use for other purposes. Be aware that the terms of your mortgage will
change; you’ll likely have a new repayment schedule and rate. Since you’ll owe more than you do
currently, you’ll either need to make higher monthly payments or amortize payments over a longer time
period. However, if the interest rate is more favourable now than when you first financed your home, it
can work to your advantage.
When you sign on the dotted line for this refinancing loan, you receive your money in a lump sum. The
money is first used to pay off your existing mortgage, as well as closing costs and prepaid items such as
home insurance. The remainder is yours to use as you see fit over as long a period as you wish.
Obtaining a HELOC
Banks and a variety of lenders offer HELOCs. In order to qualify, you’ll need to:
 Provide proof that you own your home
 Provide mortgage details, such as the current mortgage balance, term and amortization period
 Allow your lender to assess your home’s value

You will also need to register your home as collateral, using the services of a lawyer, a title company or,
in Quebec, a notary.
Closing costs for a HELOC are minimal, but there may be annual fees and transaction fees.
Obtaining a Cash-Out Mortgage
A cash-out mortgage is a new mortgage, so you’ll have to reapply for mortgage approval. Remember,
you’ll need at least 20 per cent equity in your home before you can even consider refinancing.
You’ll need to provide your lender with documentation for:
 Your credit score
 Proof of income
 Company financial statements, if you own a business
You’ll also need to be prepared for closing costs similar to those you had for your original mortgage.
Considerations:
If you know that you’ll need a specific amount of money for a particular renovation project or a dream
trip, a cash-out mortgage might make the most sense, since it is a structured plan. If your needs are less
predictable, but you anticipate needing more money periodically than you have on hand, the flexibility
offered by a HELOC may be best for you.
Once you obtain either a HELOC or a cash-out mortgage, you can spend the available money at will.
However, the Wilson Team of Mortgage Specialists advises you not to enter into either of these
transactions lightly. Have a plan for the money you’re borrowing and create a repayment schedule and
stick to it.
Let us help you determine which of these options is best for your individual needs. The Wilson Team is
here to help you make your dreams come true while accessing the best possible terms.

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