Taking out a home equity line of credit (HELOC) has become a popular way to borrow. A recent survey commissioned by the TitlePLUS title insurance program showed that more than one-third (36%) of Canadians have a HELOC. This makes sense when you think about the advantages that this type of loan offers. HELOCs are flexible – you can borrow against and pay back the loan at just about any time – and they often offer low interest rates. However, this type of loan also has its drawbacks, which the TitlePLUS survey showed many Canadians may not know about.
According to the survey, which sampled 1,501 Canadians aged 18 or older in October 2011, 59% of Canadians are confident in their level of knowledge about HELOCs. But when asked to answer specific true-or-false questions about how HELOCs work, those surveyed correctly answered only 38% of the questions.
The survey showed there are 6 things many Canadians don’t know about their HELOC.
- 57% of survey respondents didn’t know that when you take out a HELOC, the bank lending you money puts a mortgage on your home.
- 58% didn’t know that taking out a HELOC when you already have a mortgage on your home means that the bank places a second mortgage on your home, or modifies the original mortgage to account for the loan.
- 58% didn’t know that when you take out a HELOC, your home becomes the bank’s security for any credit card debt, other loans you have with that bank, or any other loans you have co-signed.
- 62% didn’t know that having a HELOC could hurt your ability to take out a loan or mortgage with another financial institution.
- 83% didn’t know that when you pay off and close your HELOC, any credit card consolidated under this line of credit may be cancelled and not available for future use.
- 69% didn’t know that having a HELOC can negatively affect your credit rating or future loan applications.
While HELOCs can be a convenient way to borrow, keep in mind that you’re using your home as collateral. That means that while you owe money on a HELOC, the bank has a financial claim to your home. You likely won’t be able to sell or refinance your home until you’ve paid off your loan in full. If you miss payments, you could even be at risk of losing your home.
To make sure you understand how your HELOC works and what the risks are, LawPRO (the insurance company that provides TitlePLUS title insurance) advises talking to a lawyer before signing on the dotted line. And that’s something many Canadians don’t appear to be doing.
According to the TitlePLUS survey, although 55% of respondents reviewed their loan documents with a loan officer and 33% read all the fine print, only 12% talked with a lawyer before signing the agreement. A surprising 11% admitted to not reviewing any documents or seeking advice before signing.