# HELOC vs LOC



## Koala (Jan 27, 2012)

I'm taking the plunge into home ownership. I plan on setting up some type of LOC as an emergency fund, along with some cash too.

The downpayment was 20% of the purchase price. I don't know what the house would be appraised for, our lender passed it with an automatic system. I will be actually sitting down with someone to discuss options, but will wait until I have the keys to the house.

Generally, what's the rate differences between HELOCs and basic LOCs? At what point do you think it would make sense to open a HELOC?


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## m3s (Apr 3, 2010)

You can only borrow up to 65% of the home's equity for a true HELOC.. so unless the appraised value is much higher.. it's probably out of the question. You probably got a better rate on the mortgage than any LOC.. but a LOC secured by home or other asset should always get a better rate than a non-secured one


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## andrewf (Mar 1, 2010)

It depends on your credit rating. LOCs are often 4 - 5% higher than the rate on HELOCs. If you have a good rating, you might be able to shop that down to 2.5 - 3%. I haven't put much effort into it, myself, as I am pretty liquid and don't need a LOC.


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## Koala (Jan 27, 2012)

Thanks Andrew, I thought maybe it would be 1% higher or something, but I really had no clue!

m3s, I thought that the 65% rule was the maximum HELOC amount for the home's value. Not the equity in the home. 20% equity overall had to be maintained. Am I wrong?


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## andrewf (Mar 1, 2010)

I think you're right, Koala. You can still go up to 80% LTV with HELOCs, but the HELOC can only be 65% of it (rest has to be mortgage).


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## m3s (Apr 3, 2010)

You're saying the house will be valued higher than you paid? Between 65% and 80% has to be a in the form of an amortized mortgage, so what's the difference between that and financing an 80% mortgage in the first place? I've never used a HELOC so I'm not sure.


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## andrewf (Mar 1, 2010)

Honestly, I don't understand the point of that rule either. I suppose it bans 'interest-only mortgages' in the form of HELOCs which are apparently popular in comically unaffordable markets like Vancouver. A substantial portion of the LTV has to be amortized.


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## Koala (Jan 27, 2012)

Yeah, I didn't know the rules until I looked into them recently. I'm not sure what happens if the market dips. We'll probably have to go with a LOC for a while and maybe reassess after a year. Hopefully we won't have to touch the credit anyway!


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## w0nger (Mar 15, 2010)

on a related note...

Can you get a LOC secured to by a home if you have less than 35% equity?


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## andrewf (Mar 1, 2010)

My understanding is yes. You can get a HELOC if you have LTV below 80%.


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## peterk (May 16, 2010)

To add to the confusion: The following is displayed on the ING webpage when you begin the process of applying for a mortgage...

Mortgage Options  

Mortgage Only 

Mortgage and Home Equity Line of Credit (minimum of 20% in home equity required) 

Home Equity Line of Credit (minimum of 35% in home equity required)


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## MoneyGal (Apr 24, 2009)

Is that confusing? There are three separate options: borrow to buy, borrow to buy AND borrow to spend, borrow to spend only.


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## Koala (Jan 27, 2012)

That ING info actually helped confirm for me what I had read, but going from the opposite direction - equity amounts instead of loan amounts.

Any advice as to minimum amount of equity you should have before bothering opening the HELOC? Just because it can be done with 21%, I don't think it should.


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