Home Equity Line of Credit (HELOC)

A HELOC is a mortgage loan, which is usually in subordinate position (2^nd position) that allows borrowers to draw multiple advances of the loan proceeds at their own discretion. It is also called an open end mortgage, which means you can take money then return it then take it again as many times as you wish during a draw period.

Before the financial crisis there was a technique to split a high LTV (Loan-to-Value) loan over 80% into two loans: the 1^st mortgage up to 80% LTV; and the 2^nd mortgage or HELOC which covers a loan amount over 80% LTV not to pay PMI. On today’s market the 2^nd position HELOC is available up to 85% CLTV (Combined LTV which includes 1^st and 2^nd mortgages). For example: You purchase a house for $650K market price and you need a loan amount 520K (80% LTV) which is a jumbo (non conforming) loan. To get a better rate it is wise to split one mortgage into two mortgages: the 1^st mortgage up to $417K (64% LTV) for single family residence which gives you a lower rate (so called conforming loan) and the 2^nd position HELOC or 2^nd fixed mortgage for $103K (16% LTV).  64% LTV + 16% LTV = 80% CLTV.  The best option in this situation is HELOC which offers you a lower rate than 2^nd fixed mortgage.

You can even obtain HELOC as the 1^st position mortgage up to 75% of the property value and up to $350K limit amount. Current HELOC rate is lower than the 1^st fixed mortgage rates and it is based on the prime rate that is 3.25% (the lowest rate in 95-year history) plus adjustments. The Fed said it expected to keep its rate at “exceptionally low levels … for some time.” Using HELOC as a substitute for the first mortgage is risky because HELOC rate is always adjustable and some day it will go up. But with HELOC you can enjoy interest-only payments.

HELOC Par Rates = Prime Rate (3.25%) + Margin

 1^st Position up to 75% LTV (Loan-to-Value)

Line Amount	FICO 720+	FICO 700	FICO 680	FICO 650
$100,001 – 350,000	4%	4%	4%	4%
$50,001 – 100,000	4%	4%	4%	4%
$25,001 – 50,000	4%	4%	4%	4.25%
$10,000 – 25,000	4%	4%	4%	4.5%

 2^nd Position up to 85% CLTV (1^st mortgage amount + HELOC)

Line Amount	FICO 720+	FICO 700	FICO 680	FICO 650
$100,001 – 350,000	4%	4%	4%	4.25%
$50,001 – 100,000	4.5%	4.75%	5.0%	5.25%
$25,001 – 50,000	4.75%	5.0%	5.25%	5.5%
$10,000 – 25,000	5.0%	5.25%	5.5%	5.75%

HELOC has a draw period during which the borrower can use the line, and a repayment period during which it must be repaid. Draw periods are usually 10-15 years, during which the borrower is only required to pay interest. Repayment periods are usually 10-20 years, during which the borrower must make full payments (principal + interest) to pay off the loan.

New Regulations — Refinance up to 125% Loan-to-Value

Refinance Rules Expanding to 125% Loan-to-Value
By: Diana Olick, CNBC Real Estate Reporter / 01 Jul 2009

 ”Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes’ value under new regulations enacted Wednesday.

The rule changes, part of the government’s attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.

Previously, homeowners could borrow up to 105 percent of their home’s value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.”

Read full article…

Refinance your 1st mortgage up to 105% Loan-to-Value

Home Affordable Refinance Program is a great option for borrowers looking for more stable payments in declining markets.

Who can be eligible for a program:

- Only Freddie Mac or Fannie Mae loans.

- Maximum Loan-to-Value (LTV) is 105%.

- There are CLTV limits (Freddie Mac) and 110% CLTV (Fannie Mae).

- Rate/Term Refinance only.

- 40, 30, 20, 15 year Fixed Rate and 5/1, 7/1, 10/1 ARM programs are allowed. If the existing loan is a fixed rate product, the new loan cannot be an adjustable rate mortgage product.

- Only 1^st mortgage is eligible.

- Second Mortgages are ineligible. Existing subordinate financing must be re-subordinated or paid off with borrower’s own funds.

- Sub-prime, FHA, VA, Alt-A, High Balance Conforming Loans (any loan above the conforming loan limits) are ineligible.

- The current occupancy (primary residence, second home or investment property) must be the same as when the original loan closed, except that the occupancy may have changed to primary residence.

- Property type is allowed:

1. For primary residence: SFR, 2-4 units, Coop, Condo, PUD
2. For second home:  SFR, Coop, Condo, PUD
3. For investment property: SFR, 2-4 units, Condo, PUD

- Fully amortizing only; the Interest-Only payment feature is not allowed.

- A borrower must have an acceptable payment history on their mortgage. The existing mortgage being paid off cannot have any 30-day late payments (Freddie Mac) and 60-day late payments (Fannie Mae) in the last 12 months.

- The program permits streamlined documentation flexibilities unless the lender chooses to obtain full documentation for the new mortgage loan.

- 620 minimum Credit Score for primary residence and 680 for Second Home and Investment Property.

- If the existing loan does not have MI (mortgage insurance) coverage, then no MI is required for the new loan. If the existing loan has mortgage insurance, the loan is currently not eligible to be refinanced under this program.

You can check on the Fannie Mae website or the Freddie Mac website if your loan qualifies for refinancing under the new program.