HELOC in today’s market | Bob Kearns
Many of you probably have a second mortgage in the form of a HELOC (Home Equity Line of Credit). But do you know how it differs from your conventional loan?
HELOCs are just that, a line of credit. They are not an amortized loan with a fixed rate over a fixed time period. HELOCs are adjustable. Typically the rate is the Prime Rate (which can fluctuate) plus a margin.
This potential fluctuation can be concerning to more conservative borrowers. Another thing to be aware of is how they are amortized. Typically, when you borrow against your HELOC, your statement will only ask for the interest on that money borrowed. Unless, you volunteer monies above and beyond what they are asking for, you won’t make any progress on your principal.
Other pitfalls include the fact that HELOCs often don’t have caps. As long as the Prime continues to rise, so will your payment. Also, keep an eye out for the terms of your pre-payment penalties. If you close out your line within 3 years, you will most likely incur a fee ranging from a few hundred dollars to 3% of your loan.
HELOCs can be very beneficial, Just make sure you understand them. They are often much cheaper to get than a conventional loan. In fact, they are often a no-closing costs loan.
With homes depreciating over the past 2 years, many lines of credit have been ‘frozen’ by the lender. Guidelines have tightened, particulary with the Loan to Value ratio you can go up to. In the past, you could get a HELOC up to 100% of your home’s value. Now, most lenders are capping this ‘LTV’ at 75% and lower.
Many lenders are no longer even offering this product. As we move forward we are finally seeing some HELOC programs come back into play. Contact me for more information.
