Question:

My bank recently offered us a Home Equity Line of Credit...I am still a little confused about it. I understand that we will be able to have available our equity as a line of credit and I think we only have to pay the interest or lock in a portion for 1-5 year payments. Is this the same as a second mortgage? Does anyone know of any risks(besides spending it all)...maybe fees or other things I should be questioning before signing on. We do have some renovations to do and I would like to take advantage of our equity if it is a good thing to do.

Answer:

A home equity line of credit is a good way to finance your home in a downward rate environment. The past twenty years have seen rates steadily decline and those who took short term or variable rates have benefitted. At some point the rates will have bottomed out and may start the steady march upwards again. A home equity line of credit can be registered as a first or second mortgage and for the most part they have no different fees than a regular first mortgage. Some banks calculate the interest monthly and others calculate their interest semi annually. (semi-annually being an overall lower rate) Currently (May 13, 2004) prime rate is 3.75% and most secured credit lines operate at prime whereas our best five year mortgage rate is 4.85%. If bank prime does not change, there is a significant savings associated with a credit line mortgage at prime. An additional bonus to a credit line is that they are usually fully open and can be repaid without penalty. If you do not want to gamble with interest rates, we have an alternative mortgage available whereby you can choose to have a five year fixed mortgage coupled with a secured credit line. For argument purposes if your home was worth $200,000 you could finance up to $150,000 combined fixed mortgage and credit line. You would choose the ratio of fixed to floating rate you are comfortable with. As you pay down the fixed portion of your mortgage your credit line portion increases. When your fixed portion is paid in full over time, you end up with a $150,000 fully open credit line on your home. If you need more information, I can be reached at 613-721-0010 to discuss this further. John Lozinski

Answered By: John Lozinski

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