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#155225 - 01/30/04 02:55 PM
HELOC question - repayment
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Gold Star
Joined: Sep 2002
Posts: 445
Dallas, TX
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Just curious - is anyone offering a variable rate HELOC? If so, how are you structuring the repayment period so that installments are substantially equal and do not result in a balloon? (eg. adjusting payment and rate annually - or some other method?) I should add that Management REALLY wants to adjust the rate monthly (we're tying to WSJ CD index).
Management does not wish to fix the rate on these as we are offering longer terms than offered on our HE loans, but I am struggling with how to advise them on the repayment. To date, our HE loans have had fixed rates although many of our lenders wish to vary these as well.
Any ideas?
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#155227 - 01/30/04 03:28 PM
Re: HELOC question - repayment
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Gold Star
Joined: Sep 2002
Posts: 445
Dallas, TX
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Quote:
I thoguht the substantially equal payments rule only applies to closed end loans or on HELOCS once they start amortizing.
How can you have substantially equal payments on a revolving line of credit where the principal balance is drawn up and down?
The repayment/amortizing phase is what I am specifically asking about, I should have been more clear. The draw period will be interest only and payments will vary not only based on the variable rate but also, as you have indicated, because the balance will fluctuate. Once the amortizing period begins, additional draws will not be permitted and the balance at the time the draw period ends will be amortized over the repayment term. However, if during the repayment/amortization period the rate is allowed to vary, I don't see how we can keep our payments "substantially" equal and not have a balloon. Just wondered if anyone had come up with an idea.
BTW, I have already been asked to define "substantially equal" which of course is not defined in the law. Managment figures if rates only go up 1/4% the payment will not increase "substantially". I think it depends on who you ask - some consumers might feel any increase in their payment is substantial. I also asked Management what they would do if rates went up 10%, hypothetically, all at once. Their reply - that never happens. But, "what if"?
My suggestion that we offer a variable rate during the draw period and a fixed rate during the repayment period, was not well received.
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#155228 - 01/30/04 05:30 PM
Re: HELOC question - repayment
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Diamond Poster
Joined: Feb 2001
Posts: 2,245
US of A
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juliad,
I am as equally in a quandry. The only practical thing I can think to do is fix the rate when it goes into repayment. I have not yet figured all this out, but I'm wondering if the actual rate for the repayment period can be left TBD when the credit agreement is executed. If not, then I'm not sure how to proceed.
Again, this is another "anti-consumer" provision created by not thinking things through to their logical conclusion. It may be that the folks who drafted the constitutional provisions did not understand how open-end credit works. Or it may be that they did understand, but that might be cynical of me to think. 
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#155229 - 01/30/04 05:37 PM
Re: HELOC question - repayment
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Power Poster
Joined: May 2002
Posts: 3,608
Near the Land of Enchantment
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Variable rates were allowable on the closed end home equities too. Did anyone offer them before HELOCs?
I guess I'm a little too trusting (and I applied logic - should have been the first warning siren) - that the payments would meet the definition of substantially equal if you set them up that way. The rate changes would affect it, but since they were allowed by the law, it would still be legal....
So what do y'all think - should I get a G tatooed on my forehead (for gullible)?
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#155230 - 01/30/04 07:01 PM
Re: HELOC question - repayment
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10K Club
Joined: Jul 2001
Posts: 83,393
Galveston, TX
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I'm not sure what the quandry is? The intent is that the regular payments amortize the loan over the course of the repayment period. The fact that the payments vary due to the impact of a variable rate should not present an issue.
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#155233 - 01/30/04 10:46 PM
Re: HELOC question - repayment
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Diamond Poster
Joined: Feb 2001
Posts: 2,245
US of A
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Quote:
BTW pardon me, I haven't figured out how to properly quote individual segments and reply in between yet! I can't get the boxes to look right.
juliad, Is this what you're trying to do?
Quote:
Four score and seven years ago our fathers brought forth on this continent a new nation...
Abraham Lincoln said the above.
Quote:
O Captain! My Captain.
Walt Whitman said that about Abraham Lincoln...
The problem is that you're nesting your "{quote}" commands and you're not closing them by using a slash as follows "{/quote}."
Note: I used {curly braces} instead of [straight braces] in the above explanation so you could see what I'm talking about.
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#155234 - 01/30/04 10:49 PM
Re: HELOC question - repayment
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Diamond Poster
Joined: Feb 2001
Posts: 2,245
US of A
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Quote:
I'm not sure what the quandry is? The intent is that the regular payments amortize the loan over the course of the repayment period. The fact that the payments vary due to the impact of a variable rate should not present an issue.
Now, back to our irregularly scheduled discussion.
I'm looking at Section 153.16(3) of the interpretations which says, in part... "[t]he lender may contract to vary the scheduled installment amount when the interest rate adjusts on a variable rate equity loan."
I hoping this addresses our repayment period question. Obviously, the timing of the rate change would have to conicide with the payment period timeframe for this to work.
Just a thought...
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#155236 - 01/30/04 11:13 PM
Re: HELOC question - repayment
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Gold Star
Joined: Sep 2002
Posts: 445
Dallas, TX
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On the 153.16 - I like where this is going so far. To expand:
153.16 (3) The lender may contract to vary the scheduled installment amount when the interest rate adjusts on a variable rate equity loan...
(4) The scheduled installment amounts of a variable rate equity loan must be:
(A) substantially equal between each interest rate adjustment; and
(B) sufficient to cover at least the amount of interest scheduled to accrue between each payment date and a portion of the principal.
So based on 4(A), would you agree this authorizes payment adjustments as often as monthly if the rate adjusts monthly or more frequently? It would seem so. (I think I'm beginning to see the light.) I swear I have read these interpretations a THOUSAND times. Sometimes you just need someone else to read it for you!
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#155238 - 01/31/04 03:01 PM
Re: HELOC question - repayment
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Diamond Poster
Joined: Feb 2001
Posts: 2,245
US of A
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Quote:
Ok, now I realize I'm splitting hairs here, but with TX law it never hurts to be careful. I knew I had read this before, and thought it was great - some clear guidance! But this paragraph refers to HE loans, do you think that one could logically infer that installment payment adjustments would similarly be allowed during the repayment phase of the HELOC?
Our job is to split hairs and then figure out which slice to use. I thought of the same thing when I was posting my message above. We will run everything past our attorney. I hope you plan to do the same.
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if their payment happened to go down.)
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