Over the past few years, if you owned a co-op in New York City, pretty much the only way you could tap into the equity of your apartment and extract some cash was by refinancing your entire mortgage.
“When interest rates were dropping, it was a smart move. You could often refinance into a lower-interest rate loan and take cash out without changing your monthly mortgage payments,” says Brittney Baldwin, National Cooperative Bank’s HELOC loan officer. “But with rates inching back up, taking cash out when you refinance means your monthly payments will be higher—on top of the $2,000 to $3,000 it costs to refinance.”
With refinancing less attractive and home values rising, the home equity line of credit (HELOC) has sprung back to life. Unlike a traditional mortgage refinance, a HELOC essentially allows you to treat your apartment like a credit card and costs only a few hundred dollars to set up (the exact price ranges depending on the value of the home).
“We’ve seen co-op owners take out HELOCs to pay tuition bills and assessments, as well as to renovate or to consolidate credit card debt,” says Baldwin.
“You borrow what you need, when you need it, and pay it back over time,” she says.
Interest rates for HELOCs are set at a certain percentage above the prime rate. Unlike a fixed-rate mortgage, your rate can fluctuate over time, but it shouldn't be more than 1 or 2 percent above the prime rate, depending on the terms of your lender.
National Cooperative Bank, which specializes in financing co-op apartments, currently offers HELOCs at a primary residence at an interest rate of prime to prime plus 1 percent, depending on a buyer's credit qualifications. With prime at 4.25 percent right now, that translates to rates at 4.25 to 5.25 percent. And during the first 10 years, you only have to pay interest on what you borrow.
“After 10 years, you pay off the balance over a term of up to 20 years,” says Baldwin.
Most lenders, including National Cooperative Bank, will allow you to borrow 70-80 percent of your apartment’s appraised value. “So if your place is worth $1 million and you have an existing $500,000 mortgage, you’ll be able to finance an additional $200,000-300,000, bringing your total debt to $700,000-$800,000,” she explains.
While some co-ops don’t allow HELOCs, most give the green light and don’t even ask what the money is for, says Baldwin, noting that “occasionally, they will limit the amount you can borrow to 50 percent of your apartment’s appraised value.”
And a HELOC is not your only option, either. NCB is now offering a home equity loan with 5-, 10- or 15-year fixed-rate options for buyers (rates depend on credit qualifications). A home equity loan is different than a HELOC because you borrow all the money at closing and you're required to pay principal and interest payments on a monthly basis. "Typically if the owner has a set project, and they want a fixed rate, they choose a home equity loan," says Baldwin. The guidelines are the same as in the case of a HELOC.
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