|HELOC rates surpass mortgage rates
|By Holden Lewis Bankrate.com
Once upon a
time, little Sallie Mae and
her younger brother, Hud, were
staying with their grandparents
for the weekend. It was dark
outside and the trees were bare.
"Read us a bedtime story, Grandpa," Sallie pleaded.
Grandpa scanned his bookshelves. "Missed Fortune," a book about growing rich through excessive mortgage debt, didn't seem appropriate for innocent ears. "The Loan Officer's Practical Guide to Residential Finance" would put the kids to sleep, all right, but for the wrong reasons. Grandpa stood there a long time, searching in vain for a children's book.
Grandpa was a
mortgage man. Had been, for
decades. He'd gone through all
the noise: the skyrocketing
rates of the early 1980s, the
crash of the early 1990s, the
boom of the early 2000s. The
ups and downs had narrowed his
focus, so the only tomes on
his shelves were mortgage books,
a Bible and an operator's manual
for a belt sander. He was going
to have to think up a bedtime
story off the top of his balding
Hud said: "Don't
tell us that story about the
mean government bureaucrat who
threw the nice mortgage broker
in a dungeon for helping people
with boo-boos to their credit.
That one scared me."
Sallie said: "You're not going to explain amortization again, are you?"
Shaking his head,
Grandpa tucked the kids in,
sat on the end of Hud's bed
and began the "Tale of
the Equity Loan and the HELOC":
a time, way back in the middle
of 2004, when you spoke only
baby talk, Hud a home equity
line of credit was a lot cheaper
than other kinds of mortgage
debt. Home equity lines of credit
were so popular that people
gave them a nickname: HELOC."
Sallie said: "Like Jennifer Lopez is called J-Lo."
"Exactly," Grandpa replied. "Back in June 2004, before the Federal Reserve started raising short-term interest rates as a preemptive strike against inflation, the average rate on a HELOC was just 5.13 percent, compared to 6.3 percent for a 30-year, fixed-rate mortgage, or 7.83 percent for a closed-end home equity loan.
"Back in those days, HELOCs were as popular as Bratz and Pokemon. People were barging into my office and demanding HELOCs. One man almost got his eyes gouged out when he tried to jump in line ahead of a woman who was knitting a sweater while she was waiting to see me.
"But in the middle of 2004, the Fed started raising the
federal funds rate every six
weeks, and that meant that the
prime rate was going up every
six weeks, and HELOCs are indexed
to the prime rate, so HELOCs
were going up, too. By the end
of 2004, what do you think happened?"