A home equity line of credit, also known as a LOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans such as credit cards. A LOC often has a higher interest rate than some other common types of home loans, and the interest may be tax deductible if used for investment purposes. Please consult your tax advisor regarding interest deductibility in relation to your personal tax status.

How a LOC works

With a LOC, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. This means you can borrow against it again if you need to, and you can borrow as little or as much as you need, up to the credit limit you establish at application. 

Qualifying for a LOC

To qualify for a LOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 80% of the value of your home minus the amount you owe. Also, a lender generally looks at your credit history, employment history, monthly income and monthly debts, just as when you first got your mortgage. 

Variable interest rate

With a variable interest rate on your home equity line of credit, the rate can change more regularly than for a standard home loan as the lender sees this as a risky product. The variable rate is calculated typically on interest only basis and the amount charged on balance outstanding depends on the number of days in a month.  

As you withdraw money from your LOC, you’ll receive monthly bills with minimum payments that covers any interest. Payments may change based on your balance and interest rate fluctuations, and may also change if you make additional principal payments. Making additional principal payments when you can will help you save on the interest you’re charged and help you reduce your overall debt more quickly. 

Note: Most LOC facilities have set-up as well as monthly account fee.