Looking for a HELOC? Find a Lender Without a Floorby Tim Manni
Borrowers, you may have noticed that the lower cost of credit engineered by the Federal Reserve is not necessarily being fully passed on to variable rate borrowers — including those with Home Equity Lines of Credit (HELOC). The reason has been a fairly new phenomenon known as interest rate floors.
“Just as ceilings create a top possible rate, floors are a bottom limit on how low the interest rate can go,” said HSH Vice President Keith Gumbinger. Not all lenders have adopted floors, and they typically don’t exist in older contracts (before 2003).
“Interest rate floors have sprung to new life in just the past few months as the prime rate has cratered to record low levels,” said Gumbinger. The Prime Rate, often used as an index for Home Equity Credit Lines, has been hovering at 3.25%. With rates so low, it’s harder for lenders to make profits, especially given that the risks of making second lien position lines of credit continue to grow. Even though the Prime Rate has a built-in markup, it’s often not enough to encourage a lender to make such credit available. Basically, lenders are striving to retain or enhance profitability.
If you’re looking for a HELOC in this challenging environment, we recommend you shop around to find a lender without an interest rate floor, so you can take advantage of the lowest possible interest rates available.