How to benefit from a Line of Credit

There are many people out there with a line of credit, but many don’t truly know how to use it to its full potential. Firstly, you should determine how long you will be using the LOC for ie. when you will be paying it off. Currently prime is at 3.00% with average discounts ranging from prime minus .50% to .65%. However, a LOC will cost anywhere from prime plus .50% to 1.00% depending on the lender. Thus, the difference in rates can range from 1.00% to 1.65%, which is a big difference. If you plan to pay out the LOC soon it will make sense to pay a higher rate to avoid a penalty. However, if you have an existing LOC and plan to keep it for at least a year, you might want to consider going with the closed variable product instead.

If you fall into the latter category, you don’t have to worry about being able to repay because many lenders offer good pre-payment options, allowing up to a 20% increase in your mortgage payment and a lump sum payment of 20% of the original mortgage amount. This will allow you to pay off the mortgage faster without any penalties. You are only required to make interest only payments on a LOC, but will have to make additional payments to decrease your principal. Contact me and I can run the numbers and determine if you will benefit from converting your LOC to a closed variable.

The second thing you want to consider is what you will be using the LOC for. Many people don’t realize that you can qualify to tax deduct the interest paid on a LOC when you use it to purchase investments; your mortgage interest is not tax deductible. There are many types of qualifying investments: you could purchase a rental property, for example, or blue-chip stocks or mutual funds.

If you are considering a LOC, you may want consider converting your existing mortgage to a re-advancable mortgage/line of credit combination, which will allow you to automatically take advantage of any increasing equity in your home. As you create equity in your mortgage account through mortgage paydown, your LOC is automatically increased by the same amount. Any tax refunds you generate should be used to accelerate mortgage paydown, which in turn, increases the LOC portion for further investments. If at any point you decide that it would be more beneficial for you to move back to a closed variable, you can choose to convert all or a portion of your LOC without any penalty. This product allows you to balance the two pressing financial goals of debt paydown and investing for your future.

LOC products can be great if used properly under the right set of circumstances. If you have or want to consider getting an LOC I recommend that you call me to go over your financial details to determine if the LOC product is the right fit for you. Sometimes there are better products out there that can fit your need much better than the one you have. Feel free to call me.