Everyone gets that borrowing is somewhat frowned upon; and that if you don’t need to do it, you really shouldn’t. But when you can be responsible with your borrowing, something such as a secured line of credit can be a real relief when there are no answers in sight, and you need financial help. But just like everything in life, there are both pros and cons to these second mortgages.
Of course the biggest advantage that comes with these loans is that you’ll have a line of credit available that you can withdraw cash from whenever you need to. And one of the best components of these loans is that you can pay it back whenever you want, typically with only the interest being due each month. You can still make payments towards the principal of the loan, usually with no prepayment penalties, and save yourself on that additional interest.
Another advantage that comes with these loans is that they are reasonably easy to obtain. As long as you hold at least 20 per cent equity in your home, lenders will typically be able to loan you up to 80 per cent of that equity.
The biggest disadvantage that comes with these loans is that if you default and neglect to repay the loan, your home will be secured against the loan, and you could lose everything. This is why it’s so important for homeowners to make sure that if they’re taking out a secured line of credit, they can afford to make the payments on it.
In addition to the interest-only payments and how easy these loans are to obtain, there is also a fee attached to these loans. This typically consists of anywhere from $500 – $800 in legal fees and $250 for an appraisal.
There has been a lot of talk about secured lines of credit lately, especially in regards to HELOCs. With proposed rules, and actual new rules that have taken the former 85 per cent equity down to 80 per cent, and everyone talking about both, many homeowners have become confused. But the new rules that are now in place are there to protect homeowners from the “ATM Syndrome” of secured lines of credit; while still providing them with the safety and the security that they need.
