3 Things to Monitor if Your Client has a HELOC

Many advisor clients have taken advantage of HELOCs as home values significantly increased during the pandemic and rates have stayed low until recently. HELOCs can be an important source of financial liquidity and a valued part of any holistic financial plan. But they are also a tool that needs to be watched as the rates rise and fall with interest rates, typically the Prime Lending Rate. As advisors look to optimize the liabilities of their clients in addition to their assets, HELOCs are one of many areas where an advisor’s financial expertise can add value. If you have any clients with HELOCs, these are the 3 things you need to look out for:

1. Rate creep. It’s no secret that rates have risen over the last year. But many clients carrying a HELOC balance might not be aware of just how high their rates have risen. This is because many clients these days put their payments on “autopay” for convenience. Last month, one of the advisors we worked with had a client who’s HELOC rate had drifted up to Prime + 2.5% (11%) without them noticing. Sora’s live liability link and “engine” alerted the advisor that the client based on their personalized factors (home value, income, debt/income, credit score) was eligible to refinance their HELOC to 8.74% (with intro rate of 5.99%), saving the client 500 basis points in year 1 and 250 basis points thereafter. Sora then helped execute the refinance with its partner lender. Furthermore, we continually see clients inquiring about SBLOC and HELOC offers in this rate environment and depressed security valuations. 

2. Rise in home value and equity available. Over the last 5 years, the S&P CoreLogic Case-Shiller U.S. National Home Price Index has risen over 50%. That means that a HELOC taken out five years ago at an 80% Loan-to-Value is now at a 53% LTV. The amount of debt relative to the value of the home is an important risk consideration for lenders. As the LTV decreases, the terms the lender is willing to give are generally more attractive, particularly if a HELOC is in a second mortgage position. Fortunately, there are many online services that provide home value estimates, wherein Sora leverages a digital appraisal tool to reflect the value lenders will appraise the property for. If you see one of your client’s home value increase, and LTVs drop, it might be time for a value-added conversation.

3. Teaser rates. While they still have a long way to go before they catch up to the credit card companies, there are occasionally “teaser rates” offered on HELOCs.  A typical teaser rate we have seen lately on our system is something on the order of an interest rate reduction of 2-3% for the first six months. Of course, after the teaser period, the rate jumps to Prime + 5%. But, if you are looking to make a recommendation to a client who is currently carrying a HELOC balance and looking for some relief, it may be a valued suggestion. Additionally, if your outlook on rates is for an interest rate decline over the medium term, the rate jump when the teaser rolls off may be mitigated by a lower Prime Rate.

While these may seem like rather simple suggestions, they can have a positive impact on your clients and your client relationships. We believe the future of financial advice is holistic with the advisor being at the center of all things financial for their clients. This includes HELOCs, mortgages, student debt, business loans, securities-based loans, car loans, boat loans, aircraft loans, vacation properties, insurance, estate, tax prep, charitable giving, and so much more. For more ideas on adding value to your clients by optimizing their liabilities, visit us at sorafinance.com.