Last week I wrote a blog asking If Home Equity Lines Were Still A Thing?
I asked because Home Equity Line of Credit (HELOC) rates are so much higher, and I pointed out that HELOCs are still “a thing,” as borrowers use them to avoid dipping into jumbo loan amount territory.
The blog turned out to be surprisingly popular, and more surprisingly – it spawned numerous questions from readers, so I decided to address some of them in today’s blog.
1. What Is PMI and How Much Are Rates?
PMI is “private mortgage insurance” that lenders usually require borrowers to pay when their loan-to-value ratio is over 80% (or when they put less than 20% down). It is called private mortgage insurance to contrast it with the government-issued mortgage insurance associated with FHA loans. PMI rates or premiums vary from under 0.20% (against the entire loan amount) per year to almost 2%, depending on credit scores and combined-loan-to-value (CLTV) ratios. For example, if a borrower has a credit score over 760 and a CLTV (1st mortgage + 2nd mortgage/purchase price) of under 85%, her PMI rate will be under 0.20%. But, if a borrower’s credit score is under 640 and her CLTV is 97%, her PMI rate can approach 2%.
2. How Can Borrowers Get Helocs for a Purchase When They Have Built No Equity?
Borrowers can get HELOCS with purchases because they bring equity to the table in the form of a down payment.
Example:
$1,500,000 Purchase Price
$150,000 Down Payment (10%)
$970,800 First Loan Amount (County loan limit)
$379,200 Second Loan HELOC (Fully drawn)
Down Payment + First Loan + HELOC = Purchase Price. The HELOC starts off fully drawn, which means that it cannot be used for renovations or any home repairs/upgrades until it has been paid down.
3. What Are Typical Heloc Terms?
RATES: Prime Rate + Margin. The margins vary from 0.49% to 2.49% for 89.99% CLTV HELOCS, depending on credit score, property location, and the size of the line of credit. Smaller loans have higher rates. There are also rate-add-ons for “riskier” states like California, Arizona, and Florida.
PAYMENTS: Payments are interest-only against the amount drawn. If a borrower has a $200,000 HELOC that is fully drawn in California, her margin might be 0.99%, making her rate 7.24%. So, her payment would be 7.24% of $200,000/12 months or $1,207 per month.
FEES: HELOC fees are minimal, ranging from $0 to $1,500 at close. They also have “annual fees” that range from $75 to $200.
For readers who would like more info, here is a rate sheet for one of the more popular HELOC providers: Symmetry Lending Broker Price Guide.
Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
