Broker explains how these loans, not usually in a broker’s wheelhouse, can be used in today's unique market conditions
Home equity lines of credit (HELOCs) aren’t necessarily in a non-bank mortgage pro’s wheelhouse. For operations that make their bones on conventional, conforming loans with the occasional foray in FHA, VA, or non-QM, this is a product set many mortgage pros are comfortable leaving to the big banks and local credit unions. But, maybe it’s time to reconsider.
While Kevin Leibowitz (pictured), president and CEO of Grayton Mortgage Inc., generally leaves HELOCs to banks and credit unions, he explained that they can play a crucial role as a “jumbo buster” - a way to bring your client’s primary purchase lien within agency-conforming levels, securing them a better long-term rate. While not necessarily ideal, in the context of today’s frothy housing market and rapid house-price acceleration, the jumbo buster tool can make the difference when offer day comes.
“I have a client in LA right now where the conforming loan limit is just above $822,000 but he’s borrowing $860,000,” Leibowitz explained. “So, I asked him how he feels about doing an $822,000 loan and a $38,000 HELOC. He has to pay down the HELOC faster but in this environment it’s great because we can get him a 2.625% rate on that $822,000 rather than over 3% on the jumbo loan. The cost of doing that is just having a slightly worse little HELOC to get him there.”
He explained that these jumbo busting strategies can also help secure a primary lien within a 10% down payment. It would be joined by a smaller HELOC or second mortgage at a higher interest rate that the client would initially pay as interest only before paying it down quicker. In the midst of this house price appreciation boom, Leibowitz is finding more and more use for these jumbo busting strategies.
Just as he’s using HELOCs to keep his clients’ primary liens conforming, Leibowitz will often dissuade them from using HELOCs as a means of paying down debt or renovating. In the current low-rate environment, when clients call him asking for a HELOC to be used that way, Leibowitz can usually explain how a cash-out refinance will actually generate the needed cash at a cheaper rate.
As for HELOCs, Leibowitz believes they’re “not a great tool” for brokers like him. The specialization banks and credit unions have made in the HELOC space makes him more averse to using them outside of their function as a jumbo buster. However, he accepts that the jumbo buster HELOC will be useful for some clients in the coming months.
If other originators want to start using HELOCs as jumbo busters, Leibowitz explained they need to watch debt-to-income ratios. HELOCs might have different debt-to-income ratios allowable than other credit sources and failing to find that out upfront can cause issues down the road. Originators also need to read the fine print of individual HELOCs to make sure they fit the client profile.
There’s an intangible benefit to mastering HELOCs, too: becoming the point-person for your clients on all their lending needs. Even if you elect not to touch these products, knowing who to refer your client to can prove an essential part of your service.
“I work with somebody in First Republic that loves a first lien HELOC on a $4 million co-op on the Upper East Side I was working on. And while she did that for me, I helped her with some loans that fall outside their much stricter credit box,” Leibowitz said. “It’s a good way to get referral partners bringing you stuff they can’t do.”