I. Why Equity Line Rates Are Plummeting
Every time the Fed cuts the Fed Funds Rate, the Prime Rate falls.
The Prime Rate is the rate that banks charge their best customers, e.g. a large corporation.
So, the Prime Rate just fell another 0.25% when the Fed cut the Fed Funds Rate.
This is very good news for Home Equity Line of Credit (HELOC) borrowers, as almost all HELOCs are tied to the Prime Rate.
The Prime Rate was 8.5% as recently as July of 2023, but it has since fallen a full 1.75% to 6.75% – which corresponds to the cumulative total of the Fed’s rate cuts.
This makes HELOCs in general much more appealing, and it is why we are closing so many of them now.
The Other Reasons We’re Closing So Many HELOCs (#3 is the most interesting):
- Keep 1st Mortgage Rate: Borrowers don’t want to refinance into a new first mortgages when their existing first mortgage rate is so low.
- Home Improvements: Most lenders (including us) falsely believed that debt consolidations were a major reason HELOCs are so popular, but a recent study revealed that most are taken out for home improvements.
- EASY!: One of our Equity Line lenders uses algorithms to underwrite, requiring NO paperwork and allowing us to get borrowers cash in only 5 days. I suspect this is the future of all lending too.
- Record Equity: American homeowners are currently sitting on $35 – $37 trillion in home equity.
SIDEBAR: Equity is a major reason why we will NOT see another 2008 meltdown. Today’s equity levels are about three times the 2006 level, and infinitely higher than 2009 levels. It’s a lack of equity that fosters foreclosures much more often than payment issues.
II. Beware: “Cash to Close” vs “Closing Costs”
Loan Estimates or “LEs” are the new “good faith estimates” setting out fees and terms of a loan – and they are confusing.
Loan officers often take advantage of this fact and use LEs to mislead borrowers into taking more expensive loans.
One trick we see is loan officers making “cash to close” artificially low by underestimating prepaid interest, property taxes, and insurance.
These LOs will then say, “see my offer is better because my cash to close is lower…” even though their actual closing costs are higher.
I blog about this frequently, e.g.: Five Misleading Closing Cost Tricks and Deciphering Bullsh*t Rate Quotes
SOLUTION: Borrowers need to carefully review LEs with their loan advisor.
III. Why We Need to Worry About Japan
Japan’s in a world of hurt, with government debt levels over 230% (U.S. is at 130%), too few buyers of their bonds (other than their own central bank), and the lack of a reserve currency (like we have) to enable them to borrow a lot longer…
As a result, they have been forced to raise their rates to attract outside bond buyers. And this is blowing up what is called the “carry trade.”
A carry trade is where investors borrow in Japanese Yen at low rates and invest in U.S. assets (Treasuries) at higher rates.
If Japanese rates go up though, this entire carry trade can blow up, forcing investors to “unwind” trillions of dollars of investments.
This will push the world’s markets into a frenzy, collapsing asset prices and … likely lowering rates. I will probably blog more about this, as there is so much more to it (I am oversimplifying).
I just find it fascinating that 99% of the world is oblivious to this risk.
