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Work and Associates Home Loans

Phone: 916-847-3090

1350 Old Bayshore Hwy Ste. 520

Burlingame,  CA  94010

margeate@workhomeloans.com

NMLS ID 394275 | DRE ID 01769353

So You're Ready To Buy A House? (Now What?)

 

Downsides of Home Equity Lines of Credit

• The rate is adjustable and tied to prime
• It can go up significantly during periods of inflation
• Rate adjustments can be frequent relative to other ARMs (multiple times per year)
• Higher interest rate caps

There are a number of reasons to steer clear of HELOCs. The main reason being that it’s an adjustable-rate mortgage.

Whenever the Fed moves the prime rate, the rate on your HELOC will change.

Usually it’s only .25% at a time, but the Fed raised the prime rate about 20 times in a row since 2004, pushing the rate from 4% to 8.25%, before it began to move the other way.

Then recently raised rates 11 times from early 2022 to mid-2023, pushing prime up more than five percentage points in the process.

So your interest rate can fluctuate greatly, even if the Fed moves prime in so-called “measured” amounts.

HELOCs generally adjust either monthly or quarterly, depending on the terms specified by the lender.

Check your paperwork so you know what to expect after the Fed makes a move.

Also note that HELOCs don’t have periodic interest rate caps like standard adjustable-rate mortgages, just lifetime caps, so the rate can fluctuate as much as the Fed allows it to, up to 18% in California (it varies by state).

Term of a Home Equity Line of Credit

• Typically begins with a 5-10 year draw period
• Where you can make interest-only payments each month
• Followed by a 10-20 year repayment period
• Where you must pay back principal and interest to satisfy the loan

A HELOC normally has a 25-year term, with a draw period and a repayment period. The draw is typically the first 5 to 10 years, followed by the repayment period of 10 to 20 years.

But it can vary, with some HELOCs offering longer draw and repayment periods to lessen the payment burden. And some shorter draw periods between 3-5 years.

During the draw period, the homeowner can borrow as much as they’d like within the line amount, and can make interest-only payments on the amount drawn upon.

There is usually a minimum payment, just like a credit card.

After the draw period, the borrower must pay off the principal of the HELOC, along with the interest. This period is known as the repayment period.

Typically the loan balance is broken down into monthly payments, but there could also be a balloon payment because of the way the loan amortizes.

Also note that some HELOCs don’t have a repayment period, so full payment is simply due at the end of the draw period. Source

Adjustable-Rate vs. Fixed-Rate Mortgage: Which Should You Choose?

In today’s high-rate environment, borrowers are looking to land the lowest possible home loan rate. While most choose fixed-rate mortgages, many consider adjustable-rate mortgages (ARMs) too, which typically offer lower interest rates for an initial period. These days, ARMs are the most popular they’ve been since 2022, accounting for about 10% of all mortgage applications, according to the Mortgage Bankers Association. Which is better for your situation: a fixed-rate or adjustable-rate mortgage?

What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage, just like it sounds, has a mortgage interest rate that adjusts — or fluctuates across its loan term.

Most ARMs today are known as “hybrid ARM” loans because they have a fixed interest rate for an initial amount of time, followed by adjustment periods — when the interest rate can go either up or down. The initial fixed rate on an ARM is typically lower than what you would pay with a fixed-rate loan.

Some common ARM terms lock in your rate for five, seven, or 10 years and then adjust it annually after the fixed period. Those are often called 5/1, 7/1, or 10/1 mortgages. Other ARM terms are available, such as a 7/6 ARM, which indicates you’d have a fixed rate for seven years and then the interest rate would adjust every six months.

Most ARMs include caps, or limits on how much your interest rate can increase or decrease during the adjustable period. Usually, there will be an initial cap on how much your mortgage can change at the first adjustment, a periodic cap that restricts how much your rate can change at each subsequent adjustment, and a lifetime cap that limits how much your interest rate can change during your entire loan term.

For example, if your rate during the introductory period is 6% and you have a 2/1/5 cap, your rate could only go as high as 8% or as low as 4% at the initial adjustment. Each subsequent adjustment could only change your rate by a maximum of 1%, and overall, your rate could only change by 5% over the loan's lifetime, so your maximum possible interest rate would be 11%.

The exact interest rate fluctuations an ARM will see depend on the margin the lender has assigned to the loan and the benchmark index rate the loan is tied to. These should be detailed in your loan documents.

For example, a benchmark could be an index such as the Secured Overnight Financing Rate (SOFR), and your margin could be 2% — meaning your rate would be two percentage points above the SOFR rate.

Most ARMs are based on a 30-year loan term. Some mortgage lenders offer a 15-year ARM — it’s just rarer.

What is a fixed-rate mortgage?

A fixed-rate mortgage is less complicated than an ARM and, therefore, easier to fit into a financial plan. Unlike an ARM, a fixed-rate mortgage has the same interest rate for the life of the loan. That means your mortgage principal and interest payments stay the same until you either refinance your loan, sell the house, or pay the balance in full. The most common fixed-rate mortgage terms are 15 and 30 years, but some lenders offer 10- and 20-year loans or individualized loan terms.

A quick note: With both fixed- and adjustable-rate mortgages, your monthly payment can change if your escrow costs (which cover property taxes and home insurance premiums) or your mortgage insurance costs change. This has nothing to do with what type of interest rate or loan you have, though.

The biggest advantage of an ARM is that it offers a lower initial interest rate and monthly payment than a fixed-rate loan typically does. And if mortgage rates decline later, you could see your rate and payment fall.

On the downside, ARM rates and payments are uncertain, and you could find yourself with a higher rate and payment down the line. Because of this, ARMs can be hard to budget for and put you at a greater risk of foreclosure (because you might have trouble making payments).

Fixed-rate mortgage loans have the advantage of stable rates and payments, which makes long-term budgeting simpler. However, the disadvantage is that interest rates are higher for fixed-rate loans at the outset, and if mortgage rates decline, you would need to refinance the mortgage to take advantage of those lower rates. Source