HELOC 101
Rising mortgage rates coupled with low inventory, lack of new home building and rising home values, has led to a trend where “Remodeling is the New Relocating”. Home remodeling has surged 30% over the last 5 years and looks like it will continue for the foreseeable future. In order to finance their remodel, many homeowners are turning to a HELOC or a “Home Equity Line of Credit” to tap into their home’s equity without refinancing their first mortgage. A HELOC is a second mortgage designed to allow you to access your home’s equity up to a specified credit limit. Here are some important things to know:
- HELOCs are similar to a “secured” credit card with lower interest rates than regular credit cards and interest rates are based on Prime Rate which is currently 5% and goes up and down with the Fed Rate. Tax deductibility varies, please consult your tax advisor.
- HELOCs typically have a margin above prime so most borrowers will pay more than 5%
- The best margins are offered to higher credit scores, larger loan amounts, and lower LTVs
- Most HELOCs are free to do and come with interest-only payments for the initial 10-year “draw period” with a subsequent 20-year “repayment period” making it a 30-year loan.
- You may need an appraisal, DO NOT start construction until you are past this stage
Questions to ask
your Retail Banker before applying:
- What are your fees? – Most are free to do and if
not, you should get a benefit for paying fees. - Do you need an appraisal and who pays? – Most
banks cover these costs, and some do “automated value models” or AVMs at the
bank so you won’t need an appraiser to come out. - Do you offer a 10-year draw period and a 20-year
repayment period? – This is standard but not everyone does it this way and you
should know before applying. - What is your margin above prime for your credit
score and loan amount? – Shop it! - Do you have an introductory rate or teaser rate?
– Most do. - Do I have to bank with you to get the rate
quoted or any sort of additional discounts?
Please ask us if you have any questions. HELOCs are a retail product only so you must apply with a bank. If we have a recent file on hand, we would be glad to help you compile the documents needed to apply and help you ascertain what banks might be best.
Common Sense Lending Making a Comeback?
There is promising news for entrepreneurs, “gig” economy workers and small business owners due to a bipartisan effort underway on Capitol Hill to make the home mortgage process HELOCs. For the last 10 years lending rules have favored applicants with documentable income such as pay stubs, W-2s and two years of steady income. These same rules have made it much more challenging to get a mortgage for people who work for themselves, earn money at multiple jobs or have seasonal swings in earnings.
The “Self-Employed Mortgage Access Act,” co-sponsored by Senators Mark Warner, D-Va., and Mike Rounds, R-S.D. aims to expand lenders’ permissible sources to verify income beyond the relatively narrow range specified in current federal regulations. Given the bipartisan nature of the proposal and the breadth of constituents affected this legislation has an excellent chance of passing, though probably not until next year’s congress. Meanwhile, Fannie Mae and Freddie Mac are actively exploring ways to more fairly underwrite self-employed and gig economy applicants. Remedies for folks that have been left out of lending are in the works — and they could come in the months ahead!
Rob Scheuing
President
Sherwood Mortgage Group, Inc.
915 Greenwich Drive
Thousand Oaks, CA 91360
(805) 496-2512 Direct
(805) 496-5235 Fax
CA Dept. of Real Estate #:01041525 NMLS #:302870
