When it comes to borrowing money, there are two main forms of debt – secured debt and unsecured debt. Secured debt is debt that is secured by some form of collateral – something worth great value to the person borrowing the debt. Unsecured debt on the other hand, is debt that is loaned to borrowers with no collateral; many credit cards are unsecured types of debt.
One of the most common types of secured debt is a secure line of credit; this type of debt uses a person’s home as their collateral. But how is it different from other types of secure debt? Exactly what is a line of credit?
A secure line of credit is a form of revolving loan wherein a homeowner can borrow against the equity in their home. Usually, secure lines of credit are second mortgages, however they can also sit in the first position, such as when a homeowner has already paid off their mortgage completely and now wants to borrow against that 100% equity.
With lines of credit, there is a large balance that the homeowner can withdraw from whenever they need money, instead of receiving a large sum of money at one time, as a homeowner would with a home equity loan.
The money still needs to be repaid, but those requirements are also not as stringent as they are with home equity loans. With home equity loans you need to pay back the agreed-upon amount every month, along with added interest, just like you did with the first mortgage. However, with a secure line of credit you can pay back little amounts a little at a time, depending on how much you’ve used.
Secure line of credit rates in Canada can also be more favourable than home equity loans. Because home equity loans are only available at fixed rates, they may not be the best option for homeowners looking to refinance when interest rates are low. But, a secured line of credit will consolidate the debt at a lower interest rate, and get the homeowner paying even less for their second mortgage.
Secure line of credit rates in Canada will still vary from lender to lender, and that’s why it’s so important that you shop around while looking to refinance or for a line of credit. A good mortgage broker can do all the shopping for you, and still come up with the best deal that will have you paying less.