Payment hike possible for a fifth of all home-equity loans
By Jeff Lazerson
What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.
Rate news summary
From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 3.90 percent, four basis points lower than last week’s 3.94 percent. The 15-year fixed averaged 3.24 percent, three basis points better than last week’s 3.27mortgag percent.
The Mortgage Bankers Association reported loan application volume was unchanged from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $424,100 loan, last year’s rate of 3.57 percent and payment of $1,921 was $79 less than this week’s payment of $2,000.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at one point cost: A 15-year at 2.875 percent, a 30-year at 3.50 percent, a 15-year agency high-balance ($424,100 to $636,150) at 3.125 percent, a 30-year agency high-balance at 3.75 percent, a 15-year jumbo (over $636,150) at 3.50 percent and a 30-year jumbo at 3.75 percent.
What I think: Just before America was hit with the Great Recession, banks were offering home equity lines-of-credit, or HELOCS, at a very generous pace.
HELOC lending peaked in 2007 at more than $229, according to Inside Mortgage Finance.
That same year, 44,300 Orange County homeowners took out new home equity lines of credit, about 10 percent of the California’s total of 444,800, according to CoreLogic.
Most all HELOCs require a minimum interest-only payment for the first 10 years.
Now, almost one out of every five HELOC’s are scheduled to reset – that is, to have their mortgage interest adjust to current rates. Mortgage data firm Black Knight reported that 19 percent of U.S. HELOC’s will reset this year, meaning monthly payments could go higher – and for some, significantly higher.
With that tapped home equity data as a backdrop, it’s easy to appreciate the spike in phone calls from panicked homeowners because they don’t know how they are going to cover their new shockingly expensive monthly HELOC payments.
For example, let’s say your interest rate is 4.25 percent, and you have a $200,000 outstanding balance. Your minimum payment would be $708 ($200,000 multiplied by 4.25 percent and divided by 12 months).
Let’s say you let that ride for the first ten years and never paid any principal down. The equity line freezes, meaning you can no longer borrow any remaining unused funds from the equity line. Worse, the amortization is forced upon you.
Equity lines are typically written with a 25 or 30 year due date. Assuming a 25 year HELOC, the lender may now bill you $1,505 per month ($200,000 amortized on 15 remaining years at 4.25 percent), more than double the interest-only payment.
One new client did an equity share, using the interest-free funds he received to significantly pay down his HELOC.
The fine print in his particular HELOC indicated the new amortizing payment was locked in for the remainder of the loan based upon his very last interest-only loan balance amortized over the life of the loan. He made this whopper principal reduction payment after his HELOC lender locked down the new payment.
First thing you need to do is read the fine print of the HELOC you signed when you originally took out the loan. Then, call the servicing lender to be sure that everyone is on the same page in their interpretation of your payment change.
You can refinance the HELOC, assuming you have enough income to qualify and enough remaining equity.
Better yet, you might net out a better overall interest rate by rolling your existing first mortgage and your HELOC into a new first.
If you can’t qualify on your own, Fannie Mae allows you to add a non-occupant co-borrower.
For Orange and Los Angeles counties, that’s a max loan of $636,150.
For loan amounts over the Fannie limit, some jumbo lenders will allow non-occupant co-borrowers to help you to qualify. Make sure your co-borrower is someone you deeply trust (they are going to be on the title to your property) and they trust you (to make the payment on time).
Jeff Lazerson - Mortgage Columnist since 2011