Welcome to another essential episode of "Loan Officer Training," the go-to podcast for professionals in the mortgage industry. This week, we're diving into "How to Structure a HELOAN," an invaluable skill set that every loan officer needs to master.
Are you ready to unlock the secrets of Home Equity Loans? In this episode, we'll guide you through the intricate process of structuring a HELOAN, ensuring you can offer your clients the best possible options while boosting your expertise and closing more deals. From understanding borrower eligibility to calculating the perfect loan amount and choosing the right terms, we've got you covered.
Join us for this engaging and informative episode as we break down the complexities of structuring a HELOAN into manageable, actionable steps. Whether you're a seasoned pro looking to refine your skills or a newcomer eager to learn, this episode promises to enhance your loan structuring capabilities and elevate your career.
Tune in to "How to Structure a HELOAN" on "Loan Officer Training" and take your mortgage expertise to the next level. Don’t miss out on this opportunity to become a trusted advisor and a go-to expert in home equity loans!
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Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!
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Episode Transcript
All right.
So welcome everyone.
My name is Kyle Hiersche.
I'm the COO of the MortgageCalculator, joined here by
President Nick Hiersche and oursales manager Jose Gonzalez.
We are a lender that specializesin non QM loans.
And what we do every Tuesday,Wednesday and Thursday evening
at 7 p.
m.
Eastern on this show is gothrough a new loan officer
training topic.
So tonight's topic is how tostructure a HE loan.
(00:22):
Definitely something that'svaluable for loan officers to
know.
So Jose, I'll let you go aheadand get right into the
presentation here.
All right.
(00:42):
How you guys, how you guysdoing?
I'm actually, sorry about that.
I was didn't know if my audiowas coming in.
Good to have you for tonight'straining on He loans.
How to structure a helo.
So let me go ahead.
(01:03):
First, I got to share my screenhere a minute.
Technical difficulty.
So what I want to get intotonight, really important on the
differentiating the differencesbetween a he loan, which is a
home equity loan and a he lock,which is a home equity line of
(01:24):
credit.
We have had a lot, I mean, a lotof action on the home equity
loan.
Realm, right?
So a lot of different optionsregarding guidelines.
I would say that the theactivity in, in secondary
allowed, there's a lot ofmomentum in DSER loans, bank
(01:44):
statement loans I 10 loans anddefinitely he loans fixed rate
second mortgages.
So let me not get ahead ofmyself.
And let me break it down for youin our presentation.
So what is a HELONE?
I just touched on it right now.
(02:05):
HELONE is a closed end fixedrate second mortgage.
I was just stating that it isdifferent from the HELOC, right?
A HELOC is an open endedvariable rate second mortgage or
a HELOC.
It actually be a first mortgageas well.
(02:26):
So big difference in being fixedrate versus variable rate.
The he loan is also availablefor primary residents, second
home and investors.
He locks are also available forprimary second home and
investors, but they are muchmore restrictive in the.
(02:46):
Income types.
That's really where theinvestors love the he loan
because the he loan is not onlyfor full doc and banks and bank
statement, but also P and L 1099 and DSCR.
Now, mind you there are somebank statement options for he
(03:07):
locks, but they're very limited.
There are not as so wide ofofferings as we have with the he
loans for the bank statements.
And that is really one of thepoints that we love here because
all of the DSCR loans that areout there where the investor may
not want to refinance out ofthat nice three or three and a
(03:31):
half percent rate that they gota couple years ago and their
property has substantially builtup equity.
And they would love to get asecond mortgage on that property
or properties so that they couldacquire some additional
investment properties.
So you could see where I'm goingwith that.
So what are some transactiondetails for the he loans?
(03:55):
Well, our eligible borrowers arethe usual that we have.
We've had lately or us citizens,permanent resident aliens.
And non permanent residentaliens.
A non permanent resident alienis a borrower that is legally
residing and legally working inthe United States.
(04:17):
They don't have a green card,right, a permanent resident
alien card, but they will eitherhave some type of a visa that
gives them work authorization,or they may have an employment
authorization document, right, awork permit, quote unquote.
He loans are not applicable forfor nationals for nationals are
(04:40):
not eligible borrowers for heloans.
Neither are I 10.
I.
T.
I.
N.
borrowers eligible propertiesare one to four unit residential
properties.
Maximum LTV.
are for primary residents, 90percent for investment
(05:02):
properties, 70%.
And the minimum credit score forthe HELONs is 660 and up.
So here's where we're going tostart breaking it down.
And because the structure to theHELON, what really involves
(05:22):
structuring a HELON is whatwe're going to cover.
in the benefits of the HELO andthe blended rate, which we're
going to cover blended rateanalysis, which we're going to
cover in the next couple ofslides.
The guidelines are all going tobe pretty basic.
Obviously you can look atguidelines and see different
scenarios that you may haveregarding the income type, but
it really boils down tounderstanding the HELO benefits,
(05:46):
right?
So as I mentioned now, the DSCRborrower that might have a three
and a half percent interestrate.
doesn't want to refinance out ofthat just to get access to
additional capital.
Well, he loan definitelyprovides a solution to that
because like I mentioned theircurrent rate environment may
discourage borrowers refinancingout of low interest rate first
(06:09):
mortgages.
Second mortgage he loans provideoptions that do not require
refinancing out of a low ratefirst mortgage.
You can combine an existingfirst mortgage with a new second
mortgage.
In this case, a he loan.
And this allows you toproportionally, proportionately
(06:30):
calculate the interest rate thatis known as the blended rate,
right?
A certain amount of a firstmortgage.
At a certain interest rate, plusa certain amount of a second
mortgage, a he loan at a certaininterest rate, and then you
calculate the interest rateexpense on each one, add that
(06:52):
up, divided by the total loanamount, and you have your
blended rate.
Now, I'm going to get into alittle bit more detail on the
formula in the coming slides.
But, and then another You havean additional good points are no
prepayment penalty fee due topaying off an existing first
mortgage.
That DSCR loan probably had athree year prepay.
(07:14):
Maybe a five year prepaid, maybeno prepaid, but it probably had
a prepaid into the bar.
It says, not only am I going toget ahead of a three and a half
percent rate, but I'm going topay a 2 percent prepayment
penalty because I'm in year twoof my three to one.
And that's going to be you know,whatever, 200, 000 times 2%,
right?
4, 000 additional eating intotheir equity.
(07:38):
So he loaned obviously nothaving.
To pay off that first mortgage.
There are additional savingsthere.
And this is now probably couldbe considered splitting hairs a
little bit here, but definitelywhen you are a loan consultant,
you have to quantify all ofthese benefits.
(07:59):
You can actually write down.
The number that each amount issaving and present that to the
borrower.
So they can actually see, thisis your total savings keeping
the low first mortgage, nothaving a prepayment penalty fee,
staying in the existingamortization schedule that you
have so that they are amortizingprinciple.
(08:21):
Let's say they're in year fourof a loan, right?
They've already made more, youknow, let's say 40 payments go,
you, you go to the amortizationtable.
And you're going to see what isthe breakdown of principle and
interest for that loan.
It's probably going to be a lotmore favorable as in more
(08:42):
principle than interest than dayone on the loan.
And certainly much morefavorable than day one on a loan
at twice the interest rate,right?
You're going to be paying higherinterest rate and amortizing
less principle with eachpayment.
In the beginning, whereas if youmaintain your current loan,
(09:04):
you're going to be paying moreprincipal and less interest of a
lower interest amount.
With each payment, then ifstarting all over again from day
one on at a higher interestrate.
So definitely that's anotheramount.
(09:24):
You can definitely quantify ifyou if they tell you where they
are in their amortization table,what payment, for example, then
you can go download anamortization table for 30 year
at that interest rate.
And you can see exactly how muchthey're paying an interest in
principle.
And then I would say we'll bepaying, see what the savings is
and add that to your wholetangible benefits there to the
(09:46):
borrower from the helo.
And those are all real numbersthat are going to make real
difference to the borrower.
So we've talked about the helobenefits.
And I mentioned about theblended rate.
and about the proportionateshare of the first and the
second.
So in the image that you seethere, you see exactly what
(10:09):
happens, right?
Usually the first mortgage isgoing to be larger than the
second mortgage, right?
And the blended rate is aweighted average of the interest
rate.
on those two or more loans.
Now, the blended rateessentially is the effective
(10:30):
interest rate on the combinedrate.
It just sounds cooler and easierto visualize when you tell
somebody the blended rate asopposed to when you're telling
them the effective rate, whichis, you know, the rate that the
real rate that they're payingwhen combining the two.
Those two loans and I didmention second mortgage is
(10:51):
usually smaller than the firstmortgage and this is what's so
important about this wholeconcept now of adding a fixed
rate he loan to a existing loanbecause since the second
mortgage is usually smaller thanthe first mortgage, the impact
on the total payment.
is going to be less than a newhigher interest rate first
(11:17):
mortgage for the total loan.
So, and that's, you know, that'spretty good when you present the
borrow with the analysis and thetangible benefits.
Now I will state there areonline blended rate calculators,
right?
So you can go like to blendedrate.
(11:37):
com for example, and just clickin some numbers And you're going
to get the same calculations,right?
But here, it's always good toknow how the formula works.
So you can visualize the savingsand better analyze it and
explain it to your barbers,simply going to an online
calculator and putting in somenumbers and getting an answer to
(12:00):
the equation is not going tohelp you understand what's
really going on unless youreally know.
What's going on?
So the blended rate calculator,like I mentioned, calculates the
proportionate share of theinterest rate for each loan.
So how exactly do you do that?
Well, first you have todetermine what is the rate on
the existing first loan.
(12:22):
And we're going to call thatRate one.
So that rate is 3.
5 percent interest rate.
Then we have to note what is thebalance of that existing first
mortgage.
In this case, the balance is350, 000.
Now rate two, that's going to beour fixed rate.
(12:44):
He loan product.
Rate two is let's say they'redoing a DSCR type loan and
investment property, of course.
So it's going to be a little bithigher rate.
So that is at 11.
75 percent rate.
And let's say that balance onthat balance too, is 150, 000.
(13:06):
So how do you calculate theblended rate?
Well, the blended rate equalsrate one.
3.
5 percent times balance one,which is 350, 000.
Now that gives us 12, 250.
And then to that you have 11.
(13:28):
75, which is the rate for the heloan multiplied times the
balance.
of the HELOM, which gives youyour answer there.
So then our blended rate is 5.
975.
You have 11.
75 times 150 equals 17, 625.
(13:48):
And then when you add the twoamounts, the 12, 250 plus 17,
625.
That's your Combined interest,divide that by 500, 000, your
combined loan amount, gives youa blended rate of 5.
975%.
(14:09):
Right.
So 3.
5, 11.
75 equals 5.
975%, which is, I can prettymuch guarantee you going to be
lower than if the same borrowerwere to go and do the cash out
refi on that same property usinga new loan, you're going to
(14:34):
have.
higher interest rate, probablygoing to be at least a high
sixes or low sevens at least,right.
And that's not taking it to themax LTV.
And that's not for a low creditscore borrower either.
So definitely you can see, oh,and, and again when they're
analyzing the benefit, rememberthe HE loan is a fixed rate
(14:57):
that's available, right forprimary second home investment.
It's fixed rate.
It's not a variable rate likethe heloc.
So they're really gonna be ableto, to plan well, whatever their
next investment will be.
So summing it all up here on ourbenefit analysis, right?
(15:18):
This is some of the stuff thatwe would be presenting to our
borrower to let them know thisis really the way to go, right?
So questions you would askyourself, right?
Does it save the borrower money?
And this is what they'rethinking.
Does it save the borrower moneycompared to getting a new first
mortgage?
(15:39):
And is it better?
To add a second mortgage orrefinance the first.
So, you know, the answer tothat, definitely borrow the
borrower will definitely benefitfrom the new second mortgage,
right?
As the annual blended.
Interest rate payment of 29,875, right?
(16:01):
That's the interest payment onthe first plus the interest
payment on the he loan is 13,875 lower than the payment for a
new first mortgage for thecomplete loan amount, obviously
at a higher interest rate thanwhat they currently have.
We're probably figuring likeseven, 7.
5 percent on that.
(16:21):
So you can see that our newfirst mortgage actually 8.
75.
So we're talking, taking this tothe limit 8.
75 percent cash out refi DSCR.
It could be a little bit lowernow, but this is just for our
example here gives an annualinterest payment of 43, 750,
(16:45):
right?
The blended mortgage interestpayment.
Is$29,875.
That's where you can see the$13,875 lower payment lower
combined payment on the two.
So definitely the way to go.
(17:06):
Oh, and one additional benefitto note.
Not sure if I noted this on thebenefit slide was the closing
costs right now.
We're really we weren'tsplitting hairs talking about
the savings when you'readvertising more principle
within the payment.
Now we're talking reallysplitting hairs is the closing
(17:29):
costs on a lower loan amount.
He loan.
Are definitely going to be lessthan the closing cost to
refinance that larger new firstmortgage, right?
Definitely something to considerthere.
So I really hope that you guysget the benefit here from being
(17:53):
able to properly structure yourhe loans.
Because again, like I wasmentioning the proper structure
and the helo begins withunderstanding the benefits that
the he loan offers.
Understanding the differencesbetween the HELO and the HELOC
and being able to break downthrough a thorough analysis like
what we just did the tangiblebenefits to the borrower so that
(18:16):
they can make you basicallyempowering them so that then
they can make an educateddecision and decide if they want
to refinance that larger firstmortgage.
Or if they want to just financea new second mortgage kilo.
Don't see any questions heregoing once.
(19:06):
Nope.
No questions.
So we'll go ahead and wrap itup.
We'll be back tomorrow onThursday, 7 PM Eastern for
another episode of own officertraining series.
So thanks Jose.
Thank you everybody for joiningus.
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