About five years ago, Chase Bank got rid of its home equity line of credit (HELOC) due to market conditions.
Blame it on the pandemic, or perhaps a combination of that and the fact that first mortgage rates were so low.
There wasn’t really a need for the product because you could get a cash-out refinance instead at a dirt-cheap rate.
But that was then, and this is now. Today, most existing homeowners already have the ultra-low rate first mortgage.
So if and when they need cash, they won’t want to disrupt that loan, meaning the second mortgage comeback makes perfect sense.
Not All HELOCs Are the Same
Now let’s talk about how HELOCs work.
First off, not all HELOCs are created equal. They come with different rules and different rates, though they’re all typically tied to the prime rate.
The prime rate moves in lockstep with the federal funds rate, so whenever the Fed adjusts its own rate, the HELOC rate responds in kind.
Because the Fed hiked 11 times beginning in 2022, and has only begun to unwind that via some cuts, HELOC rates aren’t all that low.
But they often beat other options when you’re in need of cash, certainly sky-high credit card APRs and personal loans.
To come up with a HELOC rate, you add a fixed margin (set by the bank) and the prime rate, which is currently a lofty 7.50%.
In other words, you’re likely looking at a rate of 8% and higher, depending on how low the margin is.
The good news is the Fed is expected to cut about 100 basis points by early next year, so HEOC rates will also fall by 1% if that happens.
So you might eventually wind up with something in the 7% range depending on the margin, which isn’t terrible for a second mortgage.
Anyway, rates aside, a key consideration when choosing a HELOC is the rule regarding the draw.
Chase Requires You to Pull Out 85% or More of the HELOC at Closing
How much do you need to take out upon opening the account? Well, with Chase it’s apparently 85% of the total line.
In other words, if you’re approved for a $100,000 HELOC, you’d have to pull out at least $85,000 of that at closing.
This is fine if you need that money right away, but sometimes homeowners just want a line of credit for emergency use.
In that case, you wouldn’t want to pull out money unnecessarily, while also paying interest on it straight away.
This is something to think about when choosing a HELOC. Some banks and credit unions don’t have a minimum draw at all, or a very small one.
That could save you on interest while allowing you to set up a line if and when needed.
Speaking of the draw, you get three years to make additional draws on the line, so if you want more money later, you can do so, though only for the remaining 15% with regard to Chase.
Their HELOC comes with a 10-year interest-only period, followed by a fully-amortized 20-year repayment period, making it a 30-year loan (probably like your first mortgage).
Chase is offering loan amounts from $25,000 all the way up to $400,000, with a maximum combined loan-to-value ratio (CLTV) of 80%.
That means if your property is appraised for $500,000, the most you can borrow is up to $400,000, including your first mortgage.
For example, if you have an existing $350,000 first mortgage, the most you’d be able to borrow would be $50,000 for the HELOC.
Chase HELOC Comes with an Origination Fee
On top of this, Chase says “the product requires you to pay an origination fee at closing which will not exceed 4.99% of your total credit limit.”
If we pretend the HELOC is $50,000 and the origination fee is say 2%, that’s $1,000. And it could be as high as 4.99%. Again, not all banks, credit unions, or lenders charge this fee.
So you need to shop around and compare not just the HELOC rate, but also any closing costs.
But it doesn’t appear to have an annual fee, which is a plus.
Note that Chase’s HELOC is not available in the state of Texas, nor can it be used to purchase the property being used as collateral.
All in all, I’m personally not a fan of the origination fee or the fact that you have to pull a minimum of 85% of the credit line right away.
There are other lenders out there, typically credit unions, with no minimum draw and no origination fee.
Put in the time to shop around to avoid these possible costs and secure a better deal.
Read on: How to compare HELOCs from one lender to the next.
