October 22, 2018
Orion Lending offers a very wide range of products to our brokers, and thus in turn to their clients. FHA, VA, USDA, Conventional, Freddie Mac Home Possible, Fannie Mae HomeReady, Jumbo, and some very helpful & interesting Edge, Vantage, and FUEL products. Our brokers occasionally ask us about HELOCs, and, being a customer-focused lender, Orion feels that educating our brokers on this product is ultimately beneficial.
Our brokers will ask their clients, before obtaining a home equity Line, several questions to see if this is the route to meet their needs.
Can you accomplish what you want with a cash out refinance? Orion has some great programs and rates, and the rate on a refinance may be lower than a HELOC. Your client’s rate may increase but it will be fixed and over time they may be paying less for the funds needed.
Do you know how a HELOC works? A HELOC is not a fixed rate loan, it is adjustable and can adjust at any time. HELOCs operate like a credit card: your client has a credit limit and can borrow within that limit and pay back as much as they like at any time, and they have a minimum payment due every month based on their balance. If the HELOC line is open to drawing against it, your client can run the balance up and down as often as they like within the credit limit.
If you get a HELOC is your rate the Prime Rate? Maybe, but most likely not. This leads to one of the important factors about a HELOC and you need to discuss this carefully with your Orion AE and borrower. The rate is tied to the “Prime Rate” plus a “margin”. Although the margin is a fixed percentage throughout the loan (anywhere from a quarter percent to one and a half percent on average), when the prime rate moves, their rate will adjust accordingly as it adjusts with Prime.
What are the terms of the HELOC draw and repayment period? Is the line open and available for use for ten years, fifteen, twenty? If the line is shut down for use before the balance is due what are the repayment terms for the final years of the loan? Can your client continue to make interest only payments? Does the loan become fully amortized for the remaining term of the loan? Is there a potential balloon payment? These are very important terms to know as they will dictate what the financial obligations will be in the future.
Before your client goes down the HELOC path, help them look at what will happen in the future, know how their rate will be determined by knowing the margin, know how they will have to repay the debt in the near term but equally important later in the loan when the repayment terms may change. HELOCs can be very beneficial financial instruments, but like all financial tools they work best when used properly. And your Orion AE is a phone call or an email away.