Be Careful With Lines of Credit

A home equity line of credit (HELOC) often has a lower interest rate than a loan. It's certainly more flexible.

You must have a minimum of 20% equity in your home to get this type of credit.  Once you're approved for a certain credit limit, you can take out as much as you want and pay back only a required minimum amount each month. But if you do that,  remember you're making interest-only payments, so you can pay the monthly minimum and never make any progress on trimming your debt. According to RBC, which is one of the biggest providers of HELOCs, only 7 per cent of borrowers make interest-only payments.

Remember, too, that a line of credit has a floating rate that can go up. If you prefer fixed rates, stick to a conventional loan, advises moneyville.ca. A line of credit backed by your assets, such as a principal residence, usually has a lower rate than an unsecured line of credit. Both are based on the bank's prime rate, such as prime plus 1 per cent or prime plus 3 per cent. You can save money if you get a line of credit secured by your house at the same time you apply for a mortgage or refinance an existing mortgage.

Always try to pay more than the minimum amount so that you're not spinning on a treadmill of debt.