Advice for HELOC shoppers

We are often asked about HELOCs (Home Equity Line of Credit) and second mortgages, so Matt put together some notes on the topic. First, here are some terms that will help you as you are shopping for a HELOC…

• HELOC.   Home Equity Line of Credit.  Assume it’s an adjustable rate product unless you see otherwise. It functions like a credit card (a revolving line of credit) except that a HELOC is secured by your home, and the bank can foreclose if you don’t make payments.
• HELoan.  Home Equity Loan.  Usually refers a fixed loan amount with one draw rather than a line of credit.  Usually a fixed rate, but can be adjustable.
• Draw Period.  How many years you are able to draw money out of the line of credit (usually 10 years).  Some lenders offer an “interest-only” minimum payment option during the draw period.  Once the draw period has expired, the balance of the loan will be amortized over the remaining term (see repayment period).
• Repayment Period.  The full “term” of the loan.  Usually 20 or 30 years, including the draw period.
• Fixed Rate Option.  Usually when people talk about fixed rate HELOCs they are referring to an option where the lender allows you to convert all or a portion of your line of credit into a fixed rate loan.  Essentially, it creates a hybrid loan where part of the balance is subject to a fixed rate but you still have the ability to draw new funds from the credit line that will be subject to an adjustable rate.  Each lender has different requirements for exercising the option.
• Standalone vs. Piggyback. A Standalone HELOC is when you apply for a HELOC separately from any other mortgage financing. If you are reading this page, you are probably interested in a standalone HELOC. A Piggyback HELOC is when you apply for two mortgages simultaneously – usually a Conventional first mortgage and a HELOC second mortgage. Piggyback HELOCs are typically used when purchasing a home rather than refinancing.

Questions to ask when you research…

• What is the minimum initial draw amount?
• What is the index and margin?  For adjustable rate loans, there is always a base “index” (typically the Wall Street Journal Prime Rate for HELOCs) and a “margin”. The margin is added to the index to determine the current interest rate of the loan. For example, “prime plus 1.0%”.
• How is the minimum monthly payment calculated during the draw period?  Interest only?  Fully amortizing based on a 30-year term?
• What are the closing costs?  Generally, you should be paying less in closing costs for a HELOC than a traditional “agency mortgage” transaction (Conventional, FHA, VA, etc.).  Some lenders may offer to pay all closing costs.

Less important questions…

• Is there a fixed rate option?  What are the terms? How do you exercise the option?  I consider this a less important question for most people because fixed rate options are a niche product.  Most people will opt for a conventional cash-out refinance or a fixed rate second mortgage (HELoan) if they want a fixed interest rate. But a HELOC with a fixed rate option could be beneficial in some situations.
• What is the annual fee?  Nearly all HELOC’s have an annual maintenance fee required for keeping the account open.  Some may waive the fee during the first year or during years that you have an active balance.  The fee is usually nominal… $50 to $150.
• How do you withdraw funds after the initial draw at closing?  Most HELOC’s will give you a checkbook.  Some will offer a bank card (VISA or MasterCard).

Some wholesale HELOC options…

• “Wholesale” means that you’d have to apply through a broker like us. Wholesale lenders do not work directly with consumers. The benefit is faster processing and better service.  You can close a HELOC in less than 30 days most of the time through an independent broker.
• Wholesale lenders have traditionally specialized in first mortgage products (Conventional, V.A., FHA, non-QM, etc.) rather than HELOCs. So, although you can usually get the best rates on a first mortgage by working through a broker, the HELOC rates are less glamorous… just average to above average compared to other HELOC lenders.
• Below are some examples of wholesale HELOC options. The webpages linked below are written for brokers, not consumers, so some verbiage may not make sense to you.  But you can view the rate sheets and get an idea of what interest rate would be offered and some of the basic loan terms.
• This webpage (the one you are reading now) is only updated annually, so the lenders listed below may have changed their terms since our most recent page update.

Some retail HELOC options…

• You’d have to apply to these banks directly. The processing time is usually 45 to 60 days in my experience across all retail banks and credit unions.  Customer service quality varies.
• If you have a unique income situation (recently self-employed, for example), then I would skip the retail options and talk with a broker.  Retail HELOC lenders are notoriously conservative with their underwriting guidelines and make few exceptions.
• Retail rates vary widely from one lender to the next.  Below are some banks that I typically see offering better than average HELOC rates.
• Some HELOC lenders advertise their rates on bankrate.com.  Here is a list of four HELOC lenders with fixed-rate options from a random finance blog in case the fixed-rate option appeals to you.