HELOCS (Home Equity Line of Credit) Will Pose a New Threat

warning-sign200When it is reported that the Feds did not raise rates or they did raise rates, THIS IS NOT referring to LONG TERM MORTGAGE RATES. This is the Federal funds rate. When you take the Federal Funds rate of .250 plus the current 3% spread, you get the going prime rate of 3.250. This is the index that most credit cards and Helocs are tied to for adjustments. The Feds have not changed this rate since Dec. 16, 2008 and may not change it again for another year or two, let’s hope…..for those with Helocs.

Remember that the Feds raise the Fed rate or lower the Fed rate when they think the economy needs slowing down or stimulated. When they take the “first” step of tightening or loosening, approximately every 6 weeks, it is non-stop for 12-18 months at increments of .250 to .500 usually. So this is how much your rate and payments will go up, in most cases immediately, not at the end of the month, non-stop until they decide enough tightening is sufficient.

If you are at your 10 year point, unfortunately your loan could also begin a final recast or final amortization. If your loan is 50,000 or less your loan could amortize over 15 years. If your current balance is greater than 50,000 you may have an option for a 30 year amortization. Most rates right NOW at the recast rate are usually between 7-8.5%. Some banks may offer a Heloc modification or refinance but I would not count on this.

One of the most onerous rules to date is that if you pay off a Heloc or 2nd trust deed by combining it with your 1st trust deed, which in most cases is the wisest thing you could do, you are penalized by calling it a “cash out event” with higher fees, which lead to a higher interest rate. If you have 20% equity or more you are fine, and at 40% equity, there is no “hit or fee”. (These apply via Fannie/Freddie as LLPA’s-Loan Level Price Adjustments, not lender overlays) And this is usually on 417,000 or lower loans, not high balance loans where you often have to have 25% equity. The only exception is if the 2nd lien was part of your original purchase transaction, which is not very common. One other exception is a portfolio loan which allows this to be treated correctly, as a rate and term refinance, NOT a cash out event, but the product selection at this time is a venue of 1,3,5,7 & 10 year fixed ARM loans only, not 30 year fixed. Lastly, as we begin to see some rule changes solving similar problems in other areas, we would hope to see this grievous issue addressed with a rule change… just not holding my breath….

So, if you have a Heloc and we have not talked in the last several months, it may be time to review your situation again, especially with the latest appreciation of homes.