When refinancing your home, a newer trend is the option to put a portion of those funds into a HELOC (Home Equity Line of Credit).  A HELOC provides greater flexibility in accessing funds – but it is important to determine if it’s the right choice for your financial situation.

When refinancing you can utilize up to 80% of the value of your home (known as loan to value, or LTV), but with a HELOC you are limited to only 65% of the home’s value. 

Let’s break down the math!

Home value: $750,000
80% of value – maximum LTV for a refinance = $600,000
65% of value – maximum LTV for a HELOC = $487,500
 

But there are ways to combine products and maximize a loan. Access up to 80% loan to value by managing different components, for example:

HELOC component of $487,500
Mortgage component of $112,500
Both components = $600,000
 

Another example would be if you have an existing mortgage for $300,000 on your home valued at $750,000. If you keep this existing debt in a mortgage product, you can still unlock up to 80% LTV with the HELOC, as the HELOC funds are not more than the initial 65% LTV, for example:

Home value: $750,000
80% of value – maximum LTV for a refinance = $600,000

HELOC component of $300,000
Mortgage component of $300,000
Both components = $600,000

Typically, with a HELOC, you pay a higher interest rate for the advantage of having an “open” term.  The open term means you can draw the funds or pay off the funds at any time without encountering a penalty. 

Because a HELOC has a higher interest rate, it would be cost effective to place your current mortgage debt into another fixed mortgage product (fixed or variable, depending on your own preference), while utilizing your equity through a HELOC. 

The benefits to having a HELOC are endless, whether you want the ability to invest the funds for a high return, use the funds for a down payment on a second residence, have funds available to use for your child’s college or university education, or assist with a child’s down payment on their first home. 

HELOCs are becoming more popular with the new influx of tighter mortgage restrictions.  Traditionally, most lenders allowed an equity withdrawal of up to $200,000 on any refinance. But with new rules and regulations, lenders have tightened the gap and are now releasing fewer funds, if any extra at all.  If they are going to release funds they also will want to know what exactly the funds are for.  This means the advantage of a HELOC is that you can do as you please with your money – though it comes at that slightly higher interest rate.