Line of Credit vs Mortgage for your first home?

[oz388]

Hey guys,

Our current interest rate is still at the lowest level, my question is if you decide to buy a house now would you choose:

1. Fixed term Mortagage
2. Line of Credit
3. 50% Fixed term Mortagage + 50% Line of Credit

Please share your reasons~

[max_boost]

I have a LOC at prime but soon going to be prime +1 as the banks are raising it. Now I'm not going to sit here and crunch all the numbers saying you'll save XXX amount if you do this or do that but I prefer the LOC because I can pay off as much as I want or skip a payment, etc. I prefer the flexibility. But in my case I bought my house in 2005 and have 75% equity. Definitely not the case for everyone.

[FiveFreshFish]

^^^ I believe you need to at least make the interest payment each month.

[lint]

Originally posted by FiveFreshFish
^^^ I believe you need to at least make the interest payment each month.

you can draw on your loc to make that payment if needed

[broken_legs]

Originally posted by FiveFreshFish
^^^ I believe you need to at least make the interest payment each month.

true. But you can take out money then make the payment with that money. revolving your balance so to speak.

[Euro838]

So how are you able to get such a big line of credit if this is your first home? (Just curious) As before I was a home owner, even if I went across like 3-4 banks, I could maybe get a LOC total for like $100K or so and usually the interest rates would be like a prime + 2% kind of deal. At today's bank prime, that would range around the 4% area.

If you can truly purchase your first home on a LOC that you qualify for, then that is the way to go if it's better then the rates offered.

I can only assume that if you had enough income to qualify for say a $300K+ LOC with a decent rate, then you probably would know the answers to these scenarios already.

Another assumption is that you are using your parent's HELOC.

For your scenarios, the answers will vary for everyone as everyone's financial situation is different.

1. This would be good for the "set it and forget it" type of people, easy, nothing to worry about, same payments for the mortgage term. There are still options for you to pay it down faster but unless you really think you can have a lot of extra cash outside of regular payments, this option still gives you flexibility and manageable payments.

2. This option is good if the rate difference is big between a fixed rate/fixed variable rate and your LOC amount. I would have to say it would have to be at least 2-3% difference average over the same term to really take the risk.

3. In this scenario, you will have fixed monthly plus you also have to pay the interest only portion of the LOC. My opinion is that if you are going to do this, you might as well reduce your amortization period to make bigger payments for a fixed mortgage and not worry about an LOC. You're better off leveraging your LOC to invest or something.

You really should research what products are offered by the banks to understand what's best for you. Hope this helps.

[yellowsnow]

you need at least 20% downpayment to get a "home equity line of credit".

i would get the HELOC... rates will probably stay the same until sometime mid next year. Prime + 1% is what the banks have been giving out for the last few months for HELOCs.

[bg_27]

On one of my rental properties I did a HELOC instead of a mortgage, and went with the variable rate. That allowed me the flexibility in case I didnt have renters I could pay interest only payments, and reduce how much I paid when it was vacant.

A HELOC is riskier in a sense, look at what just happened with everyone's HELOC, the banks just raised the interest rates by 1%. With a mortgage you have a term of prime +0.3% or something, so prime changes, but they can't change the +0.3%, but on a HELOC they can.

I also think that a HELOC allows undisciplined people to maybe this month not pay principle and only pay interest. I think if you are very disciplined with money the HELOC might work, but if you are not very disciplined with money, go with a mortgage.

[FiveFreshFish]

Originally posted by lint


you can draw on your loc to make that payment if needed



Originally posted by broken_legs


true. But you can take out money then make the payment with that money. revolving your balance so to speak.


Can this negatively affect your credit rating?

[dezmarez]

Originally posted by bg_27
On one of my rental properties I did a HELOC instead of a mortgage, and went with the variable rate. That allowed me the flexibility in case I didnt have renters I could pay interest only payments, and reduce how much I paid when it was vacant.



thats a very good reason as to why you would make it a heloc and not a mtg!!

[lint]

Originally posted by FiveFreshFish

Can this negatively affect your credit rating?

no, why would it? a loc is revolving, you don't need a credit check to draw down on it.

[oz388]

Thanks guys for all the input!!!

To Euro838: I have 20% down payment so I think I can get some LOC right?

I asked the lender and the rate I'm interested are:

1. 3 years fixed term at 3.39%
2. 5 years variable mortgage at 2.45%
3. LOC for 3.05% (not confirmed yet)

If the place I'm going to buy is for investment, which above options should I take if I only want to hold the place for 3 or 4 years? Will our interest rate go to sky high in the next few years?...

[lint]

^^^ no, with only 20% down you don't have enough for a HELOC. HELOC typically = 80% of total value - mortgage owing.

[aypi]

Originally posted by lint
^^^ no, with only 20% down you don't have enough for a HELOC. HELOC typically = 80% of total value - mortgage owing.

sorry but can you pls. explain this. i'm very interested to know if i can get a HELOC too.

thanks.

[bg_27]

HELOC's cannot be CMHC mortgages, so you need at least 20% down/equity in the house to do a HELOC.

If you go with a FIXED rate HELOC, you CANNOT do interest only payments, it will essentially be identical to a mortgage, in terms of monthly payments, so you will have a fixed monthly payment that does both interest and principle.

[djayz]

Originally posted by aypi


sorry but can you pls. explain this. i'm very interested to know if i can get a HELOC too.

thanks.

What he's saying is that with 20% down you'll only have 20% of the homes equity in there. Most lenders for a HELOC will require you have more then 20%(usually 40%+) to receive a HELOC and only then you will get 80% of the properties value minus mortgage owing.

Example:
100000 = House purchase price
say you put 25% down = 25000

The bank will give you 80% of 25000(25% you put down)
so you will get 20000 on the HELOC, now with that said alot of banks will refuse until you have more than 40% of the value paid off but there are some that will do it after you've paid down 20%or more but it's highly unlikely and if you do get it expect a very high interest rate.

[aypi]

Originally posted by djayz


What he's saying is that with 20% down you'll only have 20% of the homes equity in there. Most lenders for a HELOC will require you have more then 20%(usually 40%+) to receive a HELOC and only then you will get 80% of the properties value minus mortgage owing.

Example:
100000 = House purchase price
say you put 25% down = 25000

The bank will give you 80% of 25000(25% you put down)
so you will get 20000 on the HELOC, now with that said alot of banks will refuse until you have more than 40% of the value paid off but there are some that will do it after you've paid down 20%or more but it's highly unlikely and if you do get it expect a very high interest rate.

ok thanks a lot. i'll give my bank a call this week.

[lint]

right concept, wrong math. in that example the heloc is $5000
80% of $100000 = $80000 minus the outstanding mortgage of $75000 = $5000.

[bg_27]

Originally posted by lint
right concept, wrong math. in that example the heloc is $5000
80% of $100000 = $80000 minus the outstanding mortgage of $75000 = $5000.

we are talking about replacing the mortgage with a HELOC, not getting a HELOC for the remaining equity.

[lint]

Originally posted by bg_27


we are talking about replacing the mortgage with a HELOC, not getting a HELOC for the remaining equity.

And what property will the HELOC be secured against? The math works the same for the property that the HELOC is secured against. The lenders will still only lend up to 80-85% of the value of the home less outstanding mortgage.