Customers unwilling to part with low-rate first-lien loans turning to HELOCs, HELs
The average 30-year fixed mortgage rate reached its highest point this week since mid-February, according to Freddie Mac – and with rates trending upwards and no immediate relief in sight, consumers are turning to second-lien mortgages rather than refinancing.
Freddie Mac’s report listed the average 30-year rate at 6.86%. And while Fannie Mae’s report on Wednesday lowered the forecasted rate projections for 2025 and 2026, one industry expert believes that rates may remain elevated for a while.
Kevin Ryan (pictured top) is the president and chief financial officer at Better.com. He said that some 30-year loans this week have checked in above 7% and believes the higher rates will stay for a while.
“We’re obviously not banking on rate relief,” Ryan told Mortgage Professional America. “And it’s now late-May, and the operating environment is the same as January, maybe even worse. So, we just are where we are. We’ve just got to play the hand we’re dealt.”
For many homeowners, that hand has been to turn to second-lien mortgages, such as home equity lines of credit (HELOCs) and home equity loans (HELs).
“We haven’t been above seven in a while,” he said. “First-lien products are hard right now, but it’s a very good market for second liens, whether it’s HELOCs or home equity loans. There has been a lot of price appreciation in homes over the last four or five years. You’ve got a consumer who, because of inflation, doesn’t have the same savings they had back in 2020.
“So, consumer savings are down, although the consumer is still healthy, and now you’ve got a 50% loan-to-value (LTV).”
‘Consumers need cash’
Because existing homes have so much built-in equity, borrowers can access that equity without giving up low-rate first-lien mortgages.
“People have some credit card debt, and they’ve got a 3% first mortgage, and you don’t want to do a cash-out refinance at 7% or 7.25%,” Ryan said. “So, they think, ‘Why don’t I just borrow $50,000 to $70,000 in a home equity and maybe debt consolidate, pay down that 15% to 20% credit card debt, and maybe do the addition to the home.’
“Consumers need cash. They are healthy enough to afford a little bit more debt, and they don’t want to pay down their first mortgage. So that’s the setup.”
Stacey Melton of Reasy Financial cautions potential homebuyers against expecting a significant drop in home prices or interest rates. She highlights the current mortgage market's stability compared to 2008.https://t.co/P08RTpSWcY
— Mortgage Professional America Magazine (@MPAMagazineUS) May 22, 2025
While lenders know they won’t be able to sell these second-lien mortgages to Fannie Mae or Freddie Mac, Ryan noted there are investors who will buy these loans.
“The capital markets' desire to buy these loans, because we can’t sell them to Fannie and Freddie, is really high right now,” he said. “We price everything to where our capital markets take out is. We’ll get bid sheets from our credit fund or dealer desk on Wall Street. Right now, we feel the buyers are paying a healthy gain on sales to us for those products relative to the risk.”
Ryan also notes a fairly even split between borrowers looking for fixed-rate HELs and variable-rate HELOCs. While there is an expectation of falling rates, making the variable-rate loan more attractive, some like the certainty of a fixed payment and full amortization schedule.
“Consumers really vary,” he said. “I’d say the variable rate has been really popular, with the ability to draw it out and draw it down has definitely been popular. But there are definitely people who say, ‘I want to know what my monthly payment is.’ They don’t want their payment to be higher than a certain number, and they prefer the fixed-rate product.”
Technology continues to expand
Ryan isn’t surprised to see major lenders like United Wholesale Mortgage (UWM) and Rocket roll out new AI-driven technology. Customers who use his company’s technology largely appreciate it.
“I think nine out of 10 will give it a positive experience,” he said. “I think we do skew a little younger, which does help with that. I think a mortgage is ripe for advancements through generative artificial intelligence. So much of what gets done on a mortgage is just crossing t’s and dotting i’s, populating documents, and answering relatively straightforward questions.
“There’s pattern recognition in a lot of the questions we get, and I think the industry is tailor-made for something like this.”
Ryan thinks that many mortgage companies, including Better.com, will be able to continue leveraging the technology to make the process more efficient and less expensive.
“I think agents can get you all the way to locking a loan,” Ryan said. “I think the consumer will be able to use the technology to have more transparency in comparison of costs. They’ll get the benefit of speed, because then the industry will be able to process these things faster. Investors also get additional transparency around loans and loan characteristics.
“In general, I view it as very positive. Over time, costs for the consumer should come down as a result of it.”
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