Increased home equity, income bring loan options

Lenders are responding to the collective sigh brought by rising home prices and household income with a of variety loan programs – some new, others familiar offerings not promoted in years.

For example, jumbo loans – those loans for amounts greater than $417,000 – have started to reappear to fuel a resurgence in luxury home markets and interest-only loans are being pitched to well-off borrowers seeking lower payments on investment-property purchases.

There is data to support these moves. Federal Reserve research shows that surging stock prices and steady home appreciation have finally allowed Americans to recover the $16 trillion in wealth they lost during the Great Recession. The gains are helping to bolster the U.S. economy and could lead to additional spending and growth.

Most of the recovered wealth has come from higher stock prices that have been flowing mainly to wealthier Americans. By comparison, the middle class derives the bulk of its wealth in the form of home equity, which has risen much less. Still, many homeowners would like to dump their old, higher rates. They have been reluctant to consider a refinance knowing that the fees, coupled with their borderline equity stake, might not make sense.

One of the newer, more interesting refinance programs recently introduced is KeyBank’s “Spring Borrowing Special,” a conceived as second mortgage product but one that could be used as a first mortgage given the circumstances of the borrower. It does not carry the up-front costs of a conventional refinance (a flat $125 origination fee, no appraisal fee or credit report fee) but title insurance is required for loans greater than $250,000. In order to get the best rates, borrowers must approve an automatic deduction from a KeyBank account, typically checking or savings.

The fixed-rate program is open to owner occupants with a 15 percent equity stake in the home. For loans less than $417,000, the Spring Borrowing Specials offers interest rates of 3.74 percent for 10 years, 3.99 percent for 15 years and 4.24 percent for 20 years. For loans greater than $417,000, 0.5 percent is added to the rate.

A line of credit option also is available – a monthly adjustable-rate mortgage tied to the prime lending rate – plus a bank margin. Prime has been 3.25 percent for more than a year. When this article was published, the line of credit product was offered at 3.99 percent, representing a margin of about 75 basis points more than the prime rate.

In addition, the bank offers a series of hybrid products called Key Equity Options (KEO) where borrowers can combine a revolving line of credit with three fixed-rate options, allotting a portion of the loan the flexibility of a HELOC while another portion retains the predictability of a fixed rate.
So, with one new program KeyBank has covered borrowers in several categories – those who wish to pull out money for spring projects, college tuitions and perhaps summer vacations; refinancers who now have a 15 percent equity stakes in their homes who have been looking for a lower rate but do not have cash for out-of-pocket expenses, plus higher-end owners seeking to consolidate debts, wants and needs with a cash-back jumbo mortgage.

“We’re a relationship bank, so we spend a lot of time talking to customers about their short-term and long-term financial goals,” said John Roehm, KeyBank’s district retail leader. “We know our customers have been paying off debt and putting off major expenditures such as new vehicles, home renovation or a new home.

“They are at a point now, however, where they are more comfortable with obtaining credit. There are things they want to do – for example, buy a new house before housing prices crest – and they are interested in our competitive rates.”

One of the major questions to be considered before taking out any loan is how long a borrower plans to remain in a home. If a family or individual plans to stay put for the long haul, it might make sense to pay the loans fees and obtain a lower interest rate rather than accept the slightly higher rate that comes from the streamlined KeyBank offering. In essence, you pay it now or pay it later.

As mentioned, the Spring Borrowing Special offers a fixed rate of 3.99 percent on its 15-year fixed-rate. According to Freddie Mac, the average rate on a 15-year fixed-rate mortgage for the week ending April 12 was 2.65 percent with an average loan fee of 1 percent of the loan amount. One percent on a $300,000 loan is $3,000. By paying more up front for a lower rate, the borrower receives a lower monthly payment for the life of the loan. If you pay for the lower rate, make sure you stay long enough to reap the benefits.

If you are quite happy with your primary mortgage and merely want to take out a second mortgage to add a shop adjacent to the garage, take time to compare a conventional second mortgage with a line of credit. We will cover both in a future column.

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