It seems any banks that are still doing home equity lines of credit (also known as a HELOC) have limited them to an 80% combined loan-to-value (LTV). This means that the existing 1st trust mortgage and any equity line cannot exceed 80% of the current appraised value. For example:

$1,000,000 appraisal
$600,000 current mortgage
80% of $1,000,000 = $800,000
$800,000 – $600,000 mortgage = $200,000 maximum equity line

I had this reinforced recently by a refinance I was attempting for a client. I am refinancing this client’s first trust mortgage, which is currently $603,000. The appraisal came in at $1,000,000. However he has an existing equity line of $245,000, and the existing equity line lender told the client he’d have to drop his equity line to $190,000 if he wanted to refinance.

We had to accept the mandate of the equity line lender because we needed them to subordinate to the new 1st trust mortgage we were refinancing.

A subordination agreement is something that shows the 2nd trust/equity line lender will ‘subordinate’, or stay in 2nd trust place, when the 1st trust refinance takes place.

When a 1st trust is paid off, the 2nd trust automatically goes into 1st trust position. Of course the new lender that is paying off the old lender mandates that it retains 1st trust position. Hence, the need for the ‘subordination agreement’ which shows the 2nd trust lender will stay in 2nd trust position.

Since the equity line lender had the client over a barrel and could stop his refinance if he did not lower his equity line (which he only owed $50,000 on, by the way), the client had no choice.

So now the client owes $603,000 on a new 1st trust mortgage that we are refinancing, and will have a new equity line capped out at $190,000. The total of those two loans is $793,000, and is a 79.3% combined loan-to-value. This is less than 80% LTV, and the equity line lender is willing to accept this.

Is it fair that since the equity line lender would have previously lent up to 90% LTV, and now has changed its guidelines to 80% that they can hijack a client’s refinance? I don’t know what fair is anymore in the banking industry, so I cannot answer.

So ask a lot of questions if you want an equity line, or if you have one currently and are thinking of refinancing your 1st trust mortgage. You need to know what the equity line lender’s combined LTV limit is.

It used to be that you could borrow 90% LTV. And actually, for a few years at the peak of the real estate boom around 2002-2004, you could borrow up to 100% LTV, and in some cases 125% LTV! You could actually borrow more than the house was worth! But that insanity deserves a separate blog post.

I would say 80% is more of a historic norm for equity line LTV’s. So if your house is worth $500,000 and you owe $400,000 on the 1st trust mortgage, you are already at 80% LTV and are likely not eligible to get any equity line.

You have to have a LOT of equity to get an equity line these days.