A line of credit is a type of home loan that allows you to borrow money from your property’s equity. You can use this money for renovation projects or purchase an investment property. This type of mortgage is similar to using a credit card because you can borrow and repay the cash until you hit the limit or reach the end of the loan term.
Benefits and risks
Securing financing under a line of credit can provide you with the following benefits:
- If you stay under your limit, you don’t have to receive approval to withdraw money.
- Credit line limits are usually larger than credit card limits and have lower interest rates, allowing you to make more expensive purchases.
- You can use a line of credit to consolidate your debt.
- You can make repayments monthly.
People with income fluctuations may benefit the most from a line of credit home loans. When their income is low, they can borrow money. When their income is higher, they can make repayments. Line of credit home loans do have some risks, particularly for people who have poor budgeting skills. Interest rates can vary, and if you cannot pay the money back, you may be at risk of losing your house due to foreclosure.
How do banks view them?
Most banks and lenders do not like approving line-of-credit mortgages. Those that do approve these mortgages have stricter requirements. One of the biggest reasons banks may not support line of credit mortgages is because even though they have the exact administrative cost as a standard home loan, the profit margin is thinner. In addition, borrowers can spend the money on whatever they want, meaning a borrower could leave a bank with a significant debt for minor purchases.
Consulting with a mortgage broker before applying for a line of credit home loan is crucial. Mortgage Street and our team of brokers can help you determine if a line of credit is right for you. As a non-bank lender, we can also help find a line of credit loan that best fits your financial situation.