News by Subject
Complete list of specialty news sections.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Mortgage Industry News
Subscription-based news for people who work in real estate finance.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from

Mortgage News Reprints
Put entire stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed stories for your web site or for your RSS reader.

News Archives
Archive of news entries.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Graphs
Directory of lenders, branch operators and mortgage service providers.
home advertise email RSS about us
HOT Topics Rates Glossary LO License Search
Consumer Mortgage News
Free mortgage news for current and prospective borrowers from a leading online mortgage industry news publication.

What to Look For When Getting a HELOC

The Mortgage Professor: How do you shop for a HELOC?

Oct. 2, 2015

By JACK GUTTENTAG The Mortgage Professor - Tribune News Service

Do I shop for a home-equity line-of-credit, or HELOC, in the same way as I would shop for another mortgage?

No, shopping for a HELOC is very different from shopping for a standard mortgage.

If you know the information you need, shopping is easier, but if you don't know what you need and don't ask the right questions, you are highly vulnerable to an overcharge. It is very unlikely that the lenders you contact will give you the information that you need unless you ask for it.

Make Sure Your Really Want a HELOC
A HELOC is a line of credit from which you can draw as you need, as opposed to a loan for a specified sum. This makes a HELOC the preferred way to finance outlays that occur intermittently, such as those arising from a sequence of home improvements. The borrower can draw on the line as payment needs arise.

The downside is that all HELOCs are adjustable rate mortgages, or ARMs, and provide borrowers with much less protection against interest rate increases than standard ARMs.
  • The interest rate on a HELOC adjusts the first day of the month following a change in the prime rate, which could be just a few days. (Exceptions are those HELOCs with an introductory guaranteed rate, but these hold only for one to six months.) Standard ARMs, in contrast, fix the rate at the beginning for periods as long as 10 years.

  • The HELOCs have no limit on the size of a rate adjustment, and most of them have a maximum rate of 18 percent except in North Carolina, where it is 16 percent. Standard ARMs may have different rate adjustment caps and different maximum rates.

Pin Down the Major Price Components
Borrowers who price shop for a HELOC will be quoted an interest rate. This is the start rate, which sometimes is shown as the APR.

Don't be confused by that.

On a HELOC the start rate and the APR are the same thing.

Typically the start rate holds for only a few months -- only rarely is it longer than six months.

Usually you must ask how long the start rate holds. It is a question that most lenders prefer to avoid, because invariably it leads to another question: What happens to the rate at the end of the start rate period?

The answer is that the new rate will be set at the prime rate plus a margin. The prime rate is the same for everyone, currently it is 3.25 percent and has been since December 2008.

But don't let that fool you, it can accelerate very quickly.

In 1980, it hit 20 percent. Whenever the prime rate changes, the HELOC rate changes by the same amount.

The margin is the amount that is added to the prime rate to determine the borrower's rate when the start rate period ends.

The margin is borrower specific. It can vary with a number of features of the borrower and the property, but the major ones are the borrower's credit score and the amount of equity supporting the HELOC. Equity is the property value less the balance on a first mortgage if there is one less the maximum draw amount on the HELOC.

Obviously the critical price feature of a HELOC, which should be the major focus of smart shoppers, is the margin. They won't get any help from the lenders because the dominant practice is to quote the start rate, which is like an automobile dealer advertising the price of the tires. Truth in lending helps not at all because the margin is not a required disclosure.

WARNING: Do not assume that the difference between your HELOC start rate and the prime rate is the margin.

Here is what can happen when you don't ask.

Borrower X, who provided me with his history, was offered an introductory rate of 4.5 percent for three months. He was told that after the three months the rate "would be based on the prime rate." At the time the loan closed, the prime rate was four percent. Three months later, the prime rate was still four percent, but the rate on his loan was raised to 9.5 percent. It turned out that the margin, which the borrower never asked about, was 5.5 percent.

Check Out Other Relevant HELOC Features
The borrower who plans to draw on the HELOC over time, will want to know whether there is a minimum draw at closing, or a minimum average loan balance.

Borrowers who are uncertain about future usage don't want to be forced to borrow money they won't need.

Upfront fees are the same types as on standard mortgages, except that HELOC lenders seldom charge points, and third party fees tend to be small and are often paid by the lender.

Some other uniquely HELOC charges that you should factor in are a cancellation fee, perhaps $350-$500, which is usually waived if the account stays open for 3 years; and an annual fee, usually $25-$75, which is often waived the first year.

Checklist for Shopping HELOCs
Here is your checklist: make sure the figures you get apply to your deal.
  • Margin
  • Introductory rate and period
  • Minimum draw if any
  • Required average balance if any
  • Cancellation fee if any
  • Upfront lender fees
  • Upfront third party fees
  • Annual fee
  • Cancellation fee

About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

next story

back to home page

To see more of The Mortgage Professor or to subscribe to the newspaper, go to

Copyright (c) 2015, The Mortgage Professor

Distributed by Tribune News Service.

This story was distributed by TNS - Tribune News Service
Refinance News
News about refinance programs, pricing and production.
H A R P 2.0 News
News stories about the H o m e Affordable Refinance Program including expanded program guidelines.

Copyright © 2016 Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

pricing engine directory

wholesale lender directory

More Mortgage News Resources ( full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter


mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

refinance news

reverse mortgage news

secondary marketing

servicing news

subprime news

wholesale lenders