Home Equity Lines of Credit are an excellent way for your borrowers to gain control of the equity in their homes. Allowing them to pay down their principle, among other beneficial financial strategies, a HELOC is a strong and freeing choice for many of your borrowers. Here we’ll outline a few of the advantages of this program and how you can identify which of your borrowers would be a good fit.
One of the primary misconceptions about a HELOC is that they are a second mortgage product only. That’s simply not true. A mortgage can be refinanced into First Lien HELOC for the full amount of the remaining principal. We realize that this product is called a HELOC, but your borrowers would be using it in a different way than the typical homeowner. Through this process, they will only have one loan to pay off – the HELOC.
To explore this payment schedule concept, let’s look at a typical amortization schedule, which is calculated monthly. Because of the nature of this model where interest is calculated monthly, borrowers are limited in their ability to pay down their principal. It’s also a challenge to accelerate the paying down of their loan. Our First Lien HELOC product, however, calculates interest daily. They’re simple interest loans based on the amount a borrower owes. This principle is key. By reducing the principal balance, borrowers are reducing their interest payments and over time, they will pay less interest on their loan.
Borrowers with positive cash flows are ideal for this first lien product. Even with variable interest rates, a HELOC makes sense for borrowers with some extra funds every month because they are continually paying down the principal on the loan. Regular amortization schedules mean that interest paid at the end of a loan is higher, which doesn’t make much financial sense for the majority of borrowers.
Borrowers can get access to equity in their homes without having to do a cash-out refi. Historically, home equity lines of credit in North America have mostly been second mortgages. However, more and more homeowners are realizing that they can break out of the typical (and costly) mortgage by refinancing their existing mortgages into a HELOC. The HELOC then serves as a first mortgage on those homes.
Following are three basic parameters for an ideal First Lien HELOC candidate:
• Debt ratio below 45%
• 660 credit and up
• 10% equity
The First Lien HELOC from Reliant Bank gives your borrowers the ability to control their equity in their homes and gain greater financial flexibility. Paying interest on a long-term loan doesn’t make sense for them if they meet some of the basic parameters above. Home equity lines of credit can free up their earning power and allow them to invest, save, spend and build wealth. For more about this program and some of our other alternative mortgage products, click here to find a Reliant Bank business development director who can review further with you.
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