The current coronavirus pandemic has affected all facets of the global economy, impacting individuals and large corporations alike. While some individuals are experiencing economic challenges due to a job loss or reduced pay, many businesses are also facing uncertainty. As the crisis evolves, banks, credit unions and other lenders are changing many aspects of how they lend money, including pausing some of their offerings.
How has the coronavirus affected the HELOC lending market?
One area that is undergoing change is the lending market for home equity lines of credit (HELOCs). In recent weeks, some of the largest banks in the United States have announced that they will no longer accept new applications for HELOCs.
Just as many individuals and families are looking to tighten their budgets and minimize their risks, banks and other lending institutions are doing the same. And whereas for individuals minimizing risk might mean canceling a gym membership or opening a new credit card without an annual fee, for banks it includes things like tightening up requirements for new loans or pausing HELOC applications.
Chase, for instance, announced last month that it would be freezing new HELOC applications and requiring almost all new mortgage applicants to have 20 percent down and at least a 700 FICO credit score. Bank of America also raised its credit score requirements for home equity products from 660 to 720.
Banks that are no longer accepting new applications for HELOC
As of May 7, 2020, there are currently two banks that are no longer accepting new applications for home equity lines of credit:
- Chase: Chase announced that it would stop taking HELOC applications on April 17.
- Wells Fargo: Wells Fargo stopped accepting HELOC applications on May 1.
What to do if you have a HELOC
While Chase and Wells Fargo have announced that they are pausing the processing of new home equity lines of credit, to date no banks have announced any changes to existing home equity lines. While most HELOC agreements do grant the lender the ability to cancel or call due a HELOC at any time, generally most banks would only do that in the direst of situations.
If you do have an existing home equity line of credit, one change that you have likely already seen is a drop in your interest rate. Most HELOCs have an interest rate that is tied to the prime interest rate. The prime rate has fallen several times over the past few months, which means that the amount of interest you’re charged on an existing HELOC balance has likely also dropped. If you can, now may be a good time to make payments on your principal or convert to a fixed-rate HELOC if your lender allows it.
Alternatives to HELOCs
If you were planning on applying for a home equity line from either Chase or Wells Fargo, your first alternative would be to look for a HELOC from another bank, especially if you have good or excellent credit. However, if you’re finding it hard to qualify, there are a few additional loan options that may be worth looking into.
In press releases announcing the freeze on new HELOCs, both Chase and Wells Fargo mentioned a cash-out refinance as a possible alternative option. In a cash-out refinance, you will receive a lump-sum payment for a certain percentage of your home equity.
One big difference between a cash-out refinance and a HELOC is that with a refinance the bank will likely cash out a smaller percentage of your equity. With a HELOC, you might be able to access up to 85 percent or more of your home’s equity; with a cash-out refinance, you might only be able to cash out up to 70 percent or 80 percent of the appraised value of your home. You may also be subject to new terms and additional closing costs.
Depending on your financial situation and how quickly you need cash, you might consider a personal loan. Unlike home equity products, personal loans are generally unsecured, and rates depend on your credit score and overall financial situation. While a personal loan will usually have a lower interest rate than a credit card, it will likely be higher than the rate you would get on a HELOC or mortgage, since the loan is not backed by your home.
Other fintech products
Fintech is a newly coined term for the mashup of traditional financial products backed by new technology. There are fintech programs that can help homeowners access equity in their homes, similar to a HELOC or a cash-out refinance. With these programs, you get cash quickly, and when you sell or refinance, you repay the company’s initial investment based on the value of your home at the time of sale or refinance. A few companies that offer this type of investment are Noah, Unison, Hometap and Point.