We all know that lenders have been freezing HELOC loans to hedge against foreclosures in the down market. But, many banks have another reason: current HELOC rates are lower than they planned for.

Smart Money reports:

“…Many lenders are not making much money off HELOCs. The cut-throat competition during the mortgage boom had lenders slashing rates to well below the prime rate, with no floor on how low they could go, says Frank Ruzicka, a mortgage banker at Cornerstone Mortgage in St. Louis. “I don’t think their models ever predicted that rates would get this low,” he says. Ruzicka’s own HELOC is now at 3%. His lender, Chase, froze his credit line in October 2008.”

Most HELOCs are pegged to the Prime Rate (i.e. they adjust every time this national index rate adjusts). Some HELOCs are a few points lower than prime, some are a few points higher. Creating HELOCs that were a point or so below prime made sense when the rate was around 6%. But, now that prime is at 3.25%, lenders aren’t making much from those credit-worthy borrowers who qualified for the below-prime rates.

For a more in-depth discussion of how HELOCs work in relation to the Prime Rate, see: How to Negotiate the Best HELOC Rates and Terms.

Tags | Heloc, heloc freeze, HELOC Rates, home equity line of credit, prime rate