HELOAN

Last Updated: 03/24/2024

Loan Highlights

  • Home Equity Loan (HELOAN) offers a fixed rate and amortized schedule with non-adjusted monthly payments, providing predictability and stability in repayment.
  • Homeowners seeking a lump sum loan upfront (instead of a draw period) based on their home equity for specific one-time expenses or projects.
  • Homeowners with significant equity in their homes and a need for immediate funds.
  • Also works on second homes and investment properties.
  • Suitable for debt consolidation, home improvements, or other large expenses with a fixed budget.
  • Typically ranges from $25,000 to $500,000 or more, depending on home equity and lender policies.

Interest Rate Estimate

Federal Fund Rate + 4.50% Margin
*The mortgage interest rate calculation above is estimated. The subject borrower for that interest rate is as follow:
  • 740 FICO score
  • 30 years fixed interest rate
  • Primary residence
  • Single family house

Terms and Breakdown:

  • Interest rate: Always fixed and based on Federal Fund Rate (HELOC is based on Prime Rate)
  • Fixed interest rate, amortized loan with a lump sum disbursement at closing.
  • Can be in 1st or 2nd lien position (not 3rd).
  • No draw period, just a straight loan with a typical amortization schedule starting out the gate.
  • Closed End Subordinate Financing: No balloon and can be amortized 20 or 30 years.
  • Monthly payments consist of principal and interest, with no flexibility for additional borrowing.
  • Borrowers receive the full loan amount upfront, making it suitable for one-time expenses or projects.
  • Can’t draw and deposit back like HELOC. Only one time draw.

Requirements:

  • FICO: 640+
  • DTI: 45/50
  • History: No Bk or Foreclosure.
  • Capped CTLV (Combined LTV) – 95% (primary residence). Lower for second homes (80% CLTV) and investment properties (70% CLTV).
  • Employment History: 2 years for W2 employees and self-employed (the amount of year can sometimes very if you’re in school or self-employed).
  • Property appraisal may be required to determine home value and equity.
  • Documentation:
    • Typical Documents: Full documentation (full docs) including pay stubs, tax returns, W-2 forms, bank statements, and proof of assets.
    • Alternative documentation (alt-docs) may NOT be accepted.

Derivative or Related Products:

  • Home Equity Line of Credit (HELOC): Provides a revolving line of credit based on home equity, allowing borrowers to draw funds as needed during the draw period.
  • Cash-Out Refinance: Allows homeowners to refinance their existing mortgage and take out additional cash based on home equity, potentially with new loan terms and lower interest rates.
  • Second Mortgage: Similar to HELOAN, a second mortgage provides a lump sum payment based on home equity but may have different terms and requirements.

Funder and Sponsors:

  • HELOANs are typically offered by banks, credit unions, and mortgage lenders, with the loan secured by the borrower's home equity.

Notes:

  • Common misunderstandings with HELOANs include:
    • Overlooking fixed repayment terms: Unlike HELOCs, which offer flexibility in borrowing, HELOANs provide a fixed lump sum payment with predetermined repayment terms, requiring careful consideration of the borrower's financial situation and budget.
    • Ignoring long-term implications: Borrowers should assess the long-term impact of a HELOAN on their financial goals and overall debt management strategy, considering factors such as interest rates, loan terms, and monthly payments.
    • Underestimating property appraisal requirements: Lenders may require a property appraisal to determine home value and equity, which can impact the amount of equity available for borrowing and affect loan approval.