What is a Secured Line of Credit?
If you need to borrow small amounts of cash over an extended period of time, a secured line of credit might be what you’re looking for. A secured line of credit is a loan that works on a revolving line of credit. Much like a credit card, you can withdraw from the line of credit as much or as little as you’d like, and pay it off monthly or whenever you have some money to help pay it down. The difference between a loan like a credit card and a secured line of credit is that the latter is “secured,” meaning that the borrower puts up collateral on the loan. And if they default, that collateral can be seized by the vendor.
The term “secured” means simply, that the lender is secure in the loan. If the borrower defaults, they will be able to take possession of the borrower’s assets that the loan was secured against, with little to no profit loss to them. A line of credit can be secured with any asset large enough to cover the amount of the loan such as a vehicle or a stock portfolio. The most common type of secured line of credit though, holds a property as security against the loan. In the case of a business this can be called a business equity line of credit or simply, a business line of credit, with the property being placed up as collateral. When the property secured against a line of credit is a residential property, they’re known as home equity lines of credit, or HELOCs.
A HELOC can be a great source of cash for homeowners who find themselves short on funds due to job loss, home renovations, or for any other unexpected life expense. In order to be approved for a HELOC, homeowners must have at least 20% existing equity in their home. Home equity is the portion of the home that the homeowner actually owns, and that percentage can be increased in a number of ways. The first is through every mortgage payment. Each mortgage payment will include a percentage of the principal amount of the loan that’s being paid off. That amount is no longer due on the loan, and the homeowner now officially owns that percentage of the home. The more the homeowner pays, the more equity they gain.
The same principal is true with the down payment. Because the down payment is not applied to the mortgage loan, a home buyer can build equity in their home before they’ve even moved in. The bigger the down payment, the lower the total mortgage loan will be; and the more equity a homeowner will have in their home from the very beginning.
Aside from just paying off the mortgage or taking out a smaller one to begin with, there is another way to increase the amount of equity in a home. Because equity is determined on a loan-to-value ratio, the more value you have in the home, the lower that ratio will be and the more equity the homeowner will have. Because of this, anything that adds value to the home such as home renovations or an increase in property prices, will add to the equity in the home.
The amount of equity you have in your home plays a huge role when trying to understand what a secured line of credit is when it’s applied against your home. The more equity you have, the more you’ll be able to borrow. But homeowners should also never take out a secured line of credit against their home for more than they can afford. While HELOCs can be a great answer, and sometimes the miracle homeowners have been looking for, retaining home equity also always means that you’re one step closer to full home ownership!
Bryan J is the author of this article. For more information about Secured line of credit or Heloc please visit canadianmortgagesinc.ca.
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