Are Home Equity Lines (HELOCs) Still A Thing?
The Prime Rate today is 6.25% – a full 3% higher than where it was last year at this time.
Prime Rate is the rate that commercial banks charge their most creditworthy customers, usually large corporations.
It matters to us though because it is also the rate that most Home Equity Lines of Credit (HELOCs) are tied to.
HELOCs are revolving lines of credit that are secured by a residential property, as most readers know.
HELOC rates are tied to Prime Rate with a “margin” attached that can vary from -0.5% to 3%, depending on the lender, the credit score, and the “combined” loan-to-value (LTV).
Combined loan-to-value (1st mortgage + 2nd mortgage/home value) can go all the way up to 95%.
HELOCs are often closed in conjunction with first mortgages to either avoid PMI or to avoid jumbo financing.
Avoiding PMI works like this: Borrower is buying a $100,000 home with 10% down. She can either get one 90% loan-to-value loan with PMI, or she can get a first/second combo loan ($80,000 fixed-rate first loan/$10,000 HELOC as the second loan) that enables her to avoid PMI because her first mortgage is under 80% loan-to-value (the cutoff LTV for PMI).
Borrowers are opting for PMI nowadays instead of combo loans with HELOCs because HELOC rates are so high.
This Is Where Helocs Are Still a Thing
We are still closing combo loans with HELOCs, despite the high rates, for one reason: to avoid jumbo financing.
Many borrowers simply don’t qualify for jumbo financing and need conforming financing to avoid going over conforming loan limits.
For example, the conforming loan limit in the Bay Area is $970,800. If a borrower wants to buy a home for $1.2 million with 10% down, she will likely get a first/second combo loan with a $970,800 conforming loan first and a $109,200 HELOC as her second loan.
Similarly, if a borrower is buying a $1.3 million home with 20% down and her credit profile is not particularly strong, she too might take advantage of first/second combo financing and get a $970,800 conforming mortgage first and a $69,200 HELOC loan second (to avoid dipping into jumbo territory).
5 Reasons to Get a Heloc ASAP
The above discussion has to do with purchases only.
For borrowers who currently own homes, I still highly recommend getting a HELOC for the reasons I set out in this blog from June: 5 Reasons to Get a HELOC ASAP!
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