HELOC

Last Updated: 03/24/2024

Loan Highlights

  • Home Equity Line of Credit (HELOC) offers flexibility and accessibility to funds based on the available equity in the home.
  • Homeowners looking to tap into their home equity for various purposes, such as home renovations, debt consolidation, or large expenses.
  • Owners who want to take out money but don’t want to refinance out their first mortgage with low interest rate.
  • Also works for second homes, and residential investment properties (even the ones with non-QM loans)
  • Suitable for ongoing expenses or projects where funds may be needed periodically.
  • Typically ranges from $25,000 to $250,000 or more (capped at $500,000) depending on home equity and lender policies.

Interest Rate Estimate

Prime Rate + 2% Margin | Always ARM and can go as high as 18%
*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 ARM.
  • Closed End Subordinate Financing: No balloon and can be amortized 20 or 30 years.
  • Can be in 1st, 2nd or 3rd lien position.
  • Revolving line of credit with a draw period (typically 3 to 10 years) .
  • Borrowers can draw funds as needed up to the credit limit, similar to a credit card.
  • After the draw period, whatever you owe is now fixed, thus, begins the amortization schedule of the owed amount, aka. repayment period (20 or 30 years excluding the draw period).
  • Minimum monthly payments during the draw period may only cover interest, with amortized principal repayment required during the repayment period.
  • During draw time, lender can reduce borrowing cap or even call the loan due (if you already too the max out) before the end of amortization schedule).
  • Interest rate on interest only payment is based on ARM rate marginal of Prime Rate but principle pay-down schedule is amortized.

Requirements:

  • FICO: 660+
  • 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 be NOT be accepted.

Derivative or Related Products:

  • Home Equity Loan (HELOAN): Provides a lump sum payment upfront based on home equity, with fixed interest rates and loan terms.
  • Cash-Out Refinance: Allows homeowners to refinance their existing mortgage and take out additional cash based on home equity, with new loan terms and potentially 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:

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

Notes:

  • Common misunderstandings with HELOCs include:
    • Underestimating variable interest rates: HELOCs often come with variable interest rates, which can lead to fluctuations in monthly payments and overall costs over time.
    • Neglecting repayment terms: Borrowers should be aware of the transition from the draw period to the repayment period, where monthly payments may increase significantly as principal repayment becomes mandatory.
    • Overborrowing: Borrowers may be tempted to draw too much from their home equity, leading to financial strain or difficulty in repaying the loan.