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As mortgage rates surge, homeowners are avoiding refinancing and flocking to HELOCs

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When Sean and Kate Sitter needed money to renew their San Jose home last year, they took more new mortgages than their existing mortgage balance, paid off their old mortgages, and extra to improve their homes. I spent money. This is known as cashout refinancing.

Since then, mortgage rates have risen by about 3 percentage points. So this year, when the couple needed more money to do a second refurbishment at home and in Carmel, there was no way to touch a mortgage that was fixed at 2.875% for 30 years. Instead, they did what more homeowners want to borrow for their home mortgage: they got a floating rate home mortgage loan facility.

Generally called HELOC, you can borrow up to a certain amount, but instead of borrowing everything at once, you can borrow only what you need and pay only with the unpaid balance.

At the mortgage rate Nearly 6%, “If fixed rate mortgages are down about 3%, or even 3.5%, refinancing cash outs today is much more expensive for all mortgages, plus what you want to borrow. It means exposing to interest rates, “said Keith Gunbinger, vice president of mortgage tracker HSH Associates. Therefore, HELOC is enjoying the resurrection.

Santa Rosa’s Redwood Credit Union has increased its HELOC balance by 16% since January.

In the first five months of this year, 107,238 people have been approved for HELOC and mortgage loans (second type of second mortgage) at LendingTree.com, an online loan marketplace. This is compared to just 83,841 offered in the first 6 months of last year.

HELOC was very popular until the 2008 financial crisis and played a role in it, Lost favor after that. Many homeowners have frozen or canceled their credit lines as home prices have fallen and mortgage arrears have increased. As interest rates fall, homeowners with equity in borrowing are more likely to refis cash out because they can lower interest rates and make money at the same time. In 2017, Congress removed some of the federal tax deductions that made housing mortgage debt very attractive.

During the first few months of the coronavirus pandemic, Tracking, Wells Fargo When CitibankCompletely stopped creating new HELOC.

Mortgage rates are rising at the fastest pace today 38 years, Refinancing activities I fell off a cliff. Bankrate.com mortgage writer Jeff Ostrowski said many homeowners still have a lump of stock, thanks to soaring prices, “the pendulum is back in favor of HELOC.” I am.

Comparison shop

However, there are more types of these loans than ever before, making comparative shopping more complex and important.

Prices and conditions vary widely from person to person and from lender to lender. Jacob Channel, senior economic analyst at Lending Tree, said at HELOC, “Don’t expect current lenders to offer the highest possible rates.”

Borrowers who want to take advantage of their equity may prefer a simpler fixed rate home equity loan.

Home equity loans and credit lines are usually called second mortgages because they are behind the first mortgage. In foreclosure, the second mortgage owner will not get a dime until the first mortgage owner is fully paid.

Most mortgage lenders can borrow up to 80% or 85% of the market value of a home, including the first and second mortgages. If your home is worth $ 1 million and your initial mortgage balance is $ 600,000, you may be able to borrow up to $ 200,000 or $ 250,000 on a mortgage loan or credit line.

These two second mortgages differ in an important way.

Home equity loans are usually fixed-rate, closed-end installment loans. For the duration of the loan (usually 5 to 20 years), you will borrow a lump sum and make a fixed payment of principal and interest, as you would with your first mortgage. The second mortgage is more risky for the lender, so you will pay a little more for the second mortgage than for the new first mortgage.

None of the Chase, BofA, Wells Fargo, or Citibank megabanks offer closed-end mortgage loans and are handing over this area to small banks and credit unions.

HELOC is an open-ended revolving loan. There is usually a 10-year lottery period. During this period, you will borrow only what you need, repay some or all of it, and borrow more unless you exceed your credit limit. In this respect, it’s like a credit card. During the lottery period, we will pay for the unpaid balance.

Most lenders only allow interest payments during the lottery period. Some companies, including Bank of America, require payment of principal and interest.

Other companies such as Fremont Bank, Let the borrower choose Between one HELOC that requires interest-only payments and another HELOC that requires principal and interest during the lottery period.

After a 10-year lottery period, the repayment period will begin. At this point, you can no longer borrow money and you need to start paying monthly principal and interest on your balance. The repayment period usually lasts 15 to 20 years.

Historically, HELOC rates fluctuated during the loan period, lottery period and repayment period, but most of them fluctuated.

HELOC and prime rate

Almost all HELOCs are associated with a prime rate. The prime rate is usually 3 percentage points higher than the federal funds rate. As the Federal Reserve raises or lowers the fund rate, the prime rate continues the next day and the bank adjusts the customer’s HELOC rate the following month. Banks raised the prime rate to 4.75% on Thursday after the Fed raised the fund interest rate by 3/4 percentage points on Wednesday.

Most borrowers pay a fixed percentage of the prime rate, called a margin. If the margin is 1% and the prime is 4.75%, the new rate will be 5.75%. Most HELOCs have a lifetime cap of about 18%.

Margins for primes depend on the type of home (detached or condominium, primary or secondary home or investment property) and its location. Loan-to-value ratio, credit score, debt-to-income ratio, and credit limits. And of course, the lender.

Many lenders offer a fixed discount or “teaser” rate between the first month and the 12th month. Some offer additional discounts when you sign up for automatic payments, link HELOC to your checking account at the same institution, or withdraw a certain amount first.

Thanks to a solid credit score and a low loan-to-value ratio (about 45%), the Sitters have acquired HELOC from the Keypoint Credit Union, which is fixed at 3.25% for one year. This is “then prime plus zero”. According to Sean Sitter, 4% of the floor.

In recent years, some lenders have begun offering HELOC with a fixed rate component.

One way they do this is to fix interest rates for an “extended introduction period” of one to five years, says Todd Dar Porto, group executive on Fremont Bank’s mortgages. I did.

Another way they do that is to be able to fix the rates of all, part, or some different parts of your balance during the draw period. “It’s a loan in the line,” Gumbinger said.

BofA allows borrowers to lock rates for up to three parts of their HELOC balance (minimum $ 5,000 each). For the same customer, the fixed interest rate can be 0.25 to 0.5 percentage points higher than the customer’s then floating interest rate. However, if the floating rate falls below the fixed rate, customers can revert to the floating rate, said David Gorman, BofA’s Northern California retail lending executive. BofA does not charge a fee to correct or uncorrect the rate.

Many lenders absorb the temporary closing costs of HELOC and sometimes mortgage loans. Many people charge HELOC an annual fee. It usually costs about $ 100 and is often exempt for the first year. Prepaid home equity loans or closing HELOC within the first few years may incur fees.

Lenders can usually freeze or lower a customer’s HELOC credit limit or close an unused credit line if the borrower is delinquent, home prices fall, or other “bad conditions”. I can do it. It’s not the risk of a mortgage loan.

The borrower must provide insurance, income, and asset proof in order to get a second mortgage, but some documentary requirements are less burdensome for HELOC than the first mortgage. “Especially if you’re getting from an existing lender, we’re making sure the client can repay,” says Dal Porto.

Evaluate carefully

Before using equity, make sure it is the right choice. If you make your first or second mortgage the default, you can lose your home. This is generally not the case for credit cards and personal loans with high interest rates.

Then find a lender who can thoroughly explain the strengths, weaknesses and details of the various home equity products. Many lenders do not sell their second mortgage through brokers or other third parties, as they often do with their first mortgage.

A mortgage loan may be appropriate if you probably need a fixed amount in advance to consolidate other debt and want to repay it in the long run, especially if you are worried about fluctuations in interest rates and payments. If interest rates go down, you can refinance your loan if you have enough income and capital and you can find a lender to do it.

If you don’t know how much you need at one time (perhaps for a large remodeling project or college tuition), HELOC may be the answer.

Some people take out HELOC as an emergency fund. Brett Nicoletti, a mortgage broker at Academy Mortgage in Los Gatos, recently acquired HELOC from a credit union. I have a periodic business. This year is probably okay, but from 2023 to 24, you may need cash. “

He added, “If things start to get rough and a cloud of recession begins to form, the competition for those loans will change. Qualifying will be difficult, perhaps smaller, and the margin for primes could be higher. I have.”

They are much less popular and can have higher closing costs, but some people are still doing cash out refis. “It’s very small at 3% at first, but if you want to borrow $ 500,000 or $ 1 million, cashout refi may make sense,” said Dal Porto.

Please note: The interest rate you see advertising is usually the lowest interest rate for the best customer of the lender. Remember to compare the rates you would pay personally. However, make sure the price does not exceed other considerations.

Michelle Anderson, Chief Loan Officer at Redwood Credit Union, assisted a couple considering three options. “When they wanted to retire, it was all a premise. Interest rates weren’t an issue. It’s all about cash flow and when do they want to pay it off,” she said.

Kathleen Pender is a freelance writer and former columnist at the San Francisco Chronicle. twitter: @KathPender

Details: Can I deduct interest on California’s second mortgage?

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