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.