Home Equity Line Limits

February 8th, 2010

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.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.


5 Responses to “Home Equity Line Limits”

  1. Mike in LA says:

    wow those are some pretty stark numbers. I remember when I bought my house 3 yrs ago I splashed out more than the required 10% down payment. I thought, so what I can always borrow it back later. Hindsight is 20/20 , but now I think that was unwise.

  2. John says:

    Thanks for posting this great information. I’m wondering if there would have been any advantage to roll the $50K owed on the equity line into the refi. Would the cost/benefit for the $793K refi (including a cash out cost I assume) not have made economic sense in your clients case?

  3. John says:

    OTOH — I think they should have considered a refi amount of the $653K owed on the 2 loans. I also assume your client would then have been eligible for a $140K equity line with an initial $0 balance. Would that have been a better financial option for them?

  4. brianm says:

    Thanks for the comment. A $793,000 refinance would have been over the “Conforming-Jumbo” loan limit of $729,250. This would have forced the loan into “Jumbo loan” territory, where the rate would have been much higher. So we could not have raised the loan to $793,000. Also, the client really wanted to keep his loan structured as it was, and did not want it altered. but thanks for thinking outside the box. One always needs to look at all the angles.

  5. brianm says:

    Another good thought, but the client did not necessarily want “cash out” at this point. He was just looking to refinance the $600,000 he owed and wrap in some of the closing costs. The client liked the idea of keeping the equity line as large as possible. So refinancing the 600k 1st trust, and taking the haircut on the equity line was the best bet for the client. He would have preferred keeping the equity line at $245,000, but cutting it back to $190,000 was acceptable to him, and we still got him a much lower rate on the 1st trust, which was the main objective in the first place.

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