for Every Homebuyer
HELOCs/HELOANs
Look, we get it.
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You refinanced into a -0.01% rate sometime in 2020, when we saw historically low mortgage rates dominate economic headlines and drive the greatest surge in home prices our nation has ever seen. This surge in value has also given you the opportunity to access all the equity that has built up within your walls, but the idea of losing that low, low rate with a cash out refinance makes you sad. Though it may be necessary on occasion to help you access even greater savings, with the alternatives of HELOC/HELOAN programs, it doesn't always have to be. Let's see if these solutions suit you.
HELOC stands for Home Equity Line of Credit. HELOAN simply stands for Home Equity Loan. What both of these programs share in common is that they are what the industry refers to as "second mortgages", or additional mortgages that are separate from your current home loan. If you qualify for one of these programs, you may be able to access equity without touching your primary mortgage rate, containing any rate increases to a smaller, secondary loan.
Let's browse some of the highlights:
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LTV Up to 90%+
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Typically No Out of Pocket Costs
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Adjustable and Fixed Rate Options
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Generally Simple Approval Process
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Only Pay Interest On Active HELOC Balance, Not Max Line Amount
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Decent Possibility of Drive By Appraisal vs Full Appraisal (LTV Dependent)
Overall, home equity second mortgages are a useful tool for sequestering higher-interest loans into their own corners. Keep in mind that the benefits of using a HELOC or HELOAN program diminish if they are comparable to the first mortgage in loan amount.
HELOCs/HELOANs
Minimum FICO Score: Lender-Dependent
Available Loan Terms: 5-30 Years
Minimum Down Payment: N/A
Maximum LTV: Varies, High As 97.5%
Time From Bankruptcy: Varies
Time From Foreclosure/Short Sale: Varies
Mortgage Insurance (Y/N): No
Eligible Use: Primary, Secondary, Investment (Rare)
Eligible Properties: Residential 1-4 Unit Properties
(Condos & Townhomes Eligible With HOA Review)
HELOCs and HELOANs are both examples of second mortgages, which are additional mortgages that reside beneath your primary home loan (assuming that you do not own your home mortgage-free, in which case your HELOC or HELOAN would become a first mortgage). Both have their upsides and downsides, and their utility to your situation will depend greatly on the objectives you are trying to achieve. Your loan originator will advise you on the suitability of these programs upon reviewal of your application and your financial goals.
There is no mortgage insurance for HELOC or HELOAN programs, and provided that they are being used on a primary residence, they have generous LTV limits. They can allow you to access equity in excess of what a conventional or FHA loan would allow; conventional and government loan programs usually enforce a maximum LTV of 80% for cash out refinances. You can also use these programs to isolate any interest rate increases.
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Bear in mind that HELOC and HELOAN programs are not without their disadvantages. HELOCs are adjustable rate mortgages; as their name suggest, HELOCs behave almost identically to a credit card, with fluctuating interest rates that react to movements in the rate markets. HELOANs are fixed-rate second mortgages, which are useful for borrowers who want peace of mind knowing that their monthly payments will not change; however, HELOANs also command a significantly higher interest rate than fixed-rate first mortgages, due to the risk the lender takes being second in priority to the prior existing first mortgage. No lender likes being second in line. Overall, these second mortgage programs find their strongest use when they are much smaller in size compared to the first mortgage.
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Appraisal requirements for second mortgage programs tend to be more relaxed, with drive-by appraisals (or even complete appraisal waivers) allowed so long as your combined LTV (CLTV) lies within their comfort zone. Typically, CLTVs of around 60% or below hold the highest odds of having an appraisal waived completely, and CLTVs below 70% may increase your likelihood of requiring only an external drive by appraisal.
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Getting Prepped for Approval
Documentation requirements for HELOC and HELOAN programs typically resemble conventional programs very closely. However, we do offer unique second mortgage programs that use alternative documentation rather than standard income and asset documentation. Standard HELOC and HELOAN programs usually have very small documentation requirements for initial approval, which can amount to your driver's license, homeowner's insurance policy copy, recent mortgage statement, and two years' worth of income forms.
To see what documents you'll need for similar loan programs, check out our prior to approval checklist page.