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Fed rate bump moves prime rate to 5%; is it time to unHELOC?

By Jeff Lazerson

6/14/18

What I think:  It’s been nearly 10 years (October 2008) since we’ve since the likes of a 5 percent prime rate. Along with this week’s rate bump, the Fed is telegraphing two more rate bumps this year, which means we can soon enough see 5.5 percent prime time. Yikes!

How can this affect you and yours?

Maybe, not at all if you’re fixed. A recent New York Fed survey indicated nearly 93 percent of consumers chose fixed rates over adjustable mortgages.

“One thing to point out is that there are fewer consumers today whose debt is tied to short-term rates, and because the majority of consumers’ debt is from mortgages, this means the recent short-term rate hikes will be less impactful than what was seen in the mid-2000’s,” said Sam Khatar, chief economist at Freddie Mac.

What about home equity lines of credit or HELOCs? Let’s keep in mind new HELOCs may still be tax deductible under the new tax rules so long as the funds are used for property acquisition or home improvement (not to exceed total mortgage debt of $750,000).

Let’s first look at trend lines for folks fresh into tapping-out some equity (equity is your property value minus your mortgage debt).

Nationally, borrowers have taken out 18 percent more HELOCs in the first quarter of 2018 compared with the fourth quarter 2017 and 14 percent more when comparing year over year, according to a just-released report from Irvine-based Attom Data Solutions.

The Los Angeles and Orange County metropolitan statistical area or MSA saw a 24 percent jump quarter over quarter but just an 11 percent jump year over year.

The Riverside and San Bernardino MSA experienced both a 13 percent quarterly jump and year-over-year increase in new HELOCs.

The San Diego MSA realized an 18 percent quarterly as well as an 18 percent year-over year-jump in HELOCs.

“Rising rates have not deterred people from taking out a line-of-credit,” said Daren Blomquist, senior vice president at Attom Data Solutions.

OK, then. What about mortgage-holders with existing HELOCs? Is it time to unHELOC?

Keep in mind the rate on a typical equity line of credit is higher than today’s 5 percent prime rate. For example, a lender may have given you prime rate plus a 1 percent margin (profit margin) tagged onto the rate. In that example, your rate is a whopping 6 percent.

The rate may not seem that high because HELOCs provide a minimum interest-only payment period of perhaps the first 10 years. After that time period, you might have another 15 years of amortized payments.

If you don’t know the terms of your existing HELOC, read your note or call your lender to be better informed.

Even if your existing first mortgage carries a much lower rate than today’s fixed rate offerings, it still might make payment sense and/or interest-rate sense to refinance your existing first and existing high balance and higher interest rate HELOC into a new fixed-rate first mortgage.

Don’t assume anything. Do your homework. Find out what is possible with a new loan by shopping around. Then, decide what is better for you and yours going forward.

If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.