What is a First Lien HELOC?
Imagine being able to borrow against your home without fully paying off your original mortgage. A first lien home equity line of credit (HELOC) makes this possible.
It acts as a home equity line of credit in the first position, allowing you to tap into your home's equity while benefiting from flexible terms and typically lower interest rates.
For homeowners looking to manage debt, make home improvements, or cover monthly expenses, a first-lien HELOC offers an appealing option.
Ready to explore how a first lien HELOC could work for you? Get started with Rate’s HELOC options!
What is a First-Lien HELOC?
A first lien HELOC is a unique loan product that functions much like a credit card, allowing you to draw funds as needed up to an approved limit.
Unlike a traditional mortgage or a home equity loan, you’re not borrowing a lump sum. Instead, you have access to a revolving line of credit with repayment terms designed to fit your financial needs.
What Is the Difference Between First and Second-Lien Helocs?
The main difference lies in the lien position. With a first lien HELOC, the lender’s debt takes priority, effectively replacing your first mortgage. If you default, the HELOC lender is paid before other creditors.
On the other hand, a second lien HELOC remains behind your original mortgage, often with different repayment terms and possibly higher interest rates.
How Does a First-Lien HELOC Work?
A first lien HELOC combines the accessibility of a checking account with your home’s equity.
During the draw period, you can withdraw funds, repaying only the interest or paying down the principal balance. Once the repayment period kicks in, you pay down both principal and interest over time.
How Funds Are Accessed and Repaid
Funds are accessible for any purpose—emergencies, planned projects, or unexpected expenses. You pay interest on what you borrow, with flexible repayment terms tailored to your financial needs.
Impact on Mortgage Payoff Timeline
Since a first lien HELOC replaces your existing mortgage, it can shift your overall payoff schedule.
Some homeowners use a strategy called velocity banking, which involves leveraging the HELOC to pay down the principal balance of their mortgage faster. By doing this, they reduce the interest owed over time.
In velocity banking, the borrower makes extra payments toward the principal, often by temporarily drawing from the HELOC to make larger payments on the mortgage balance.
This method can be a powerful tool for managing mortgage costs, but it requires careful financial management to ensure that the HELOC balance is repaid alsol.
How Does a First-Lien Heloc Affect My Ability to Refinance My Mortgage?
Because a first-lien HELOC occupies the primary lien position, refinancing might require paying off the HELOC first. To avoid complications, reach out to your mortgage lender or another qualified lender like Rate, before considering a refinance.
Flexible Repayment Options
With options for interest-only payments during the draw period, a first lien HELOC offers temporary flexibility that can help reduce monthly expenses.
What Is the Interest Rate on a First-Lien HELOC?
Interest rates on a first-lien HELOC are usually variable and depend on factors like credit score, loan amount, and lender policies. These rates are often lower than those on credit cards, making HELOCs appealing for homeowners.
Is a First-Lien Heloc Tax Deductible?
If used for home improvements, the interest on a first-lien HELOC may be tax-deductible. But it’s always best to confirm with a tax professional to understand how this could apply to you.*
Example of a First-Lien HELOC Scenario
Imagine you need $10,000 for home repairs. With a first-lien HELOC, you could draw this amount from your available credit line, allowing you to access funds without tapping into high-interest credit card debt.
During the draw period, you might choose to make interest-only payments on this $10,000, which keeps monthly payments low while providing the funds you need. Later, you can start paying down the principal as well, giving you more control over how quickly you repay the amount.
This structure can make a first-lien HELOC a useful tool for homeowners looking to manage finances over the long term.
Requirements for a First-Lien HELOC
To qualify for a first-lien HELOC, lenders, including credit unions, will review specific requirements for borrowers related to your credit score, income, and equity.
Credit Score and Financial Qualifications
A solid credit score, typically around 700 or higher, is often required. This reflects a stable financial history that gives lenders confidence in your ability to manage a mortgage loan alongside other debts.
Higher scores can also help borrowers secure more favorable interest rates on their HELOC.
Equity and Loan-to-Value Ratio Requirements
The loan-to-value (LTV) ratio is another critical factor, as it shows the proportion of your loan amount relative to your home’s value. For most first-lien HELOCs, an LTV of 80% or lower is standard, ensuring sufficient equity remains as security.
Income Verification and Debt-to-Income Ratio
Lenders verify income and assess your debt-to-income ratio (DTI) to ensure monthly payments are manageable.
A lower DTI can often mean you can take on the additional debt without overextending your finances. Strong income verification and a healthy DTI ratio reflect financial stability, which is crucial if you want to get a first lien HELOC loan approval.
Property Type and Occupancy Restrictions
A first lien HELOC typically applies to primary residences. Some lenders may approve a first-time HELOC for a vacation home or rental property under specific conditions.
But primary occupancy, which means it’s the home you live in, is often preferred due to the increased stability and lower risk they present compared to investment properties.
First Lien Heloc VS. Second Mortgage
A first-lien HELOC appeals to homeowners who want:
Cash Flow Flexibility
A first-lien HELOC appeals to homeowners who want cash flow flexibility without the commitment of a traditional mortgage refinance.
Control Over Loan Amount and Use
With a first-lien HELOC, you control your loan amount and its use, whether handling unexpected expenses, making home upgrades, or consolidating high-interest debts.
Common Reasons People Use a First-Lien HELOC
Home improvements, debt consolidation, and real estate investments are among the most popular uses.
With interest-only payments during the draw period, the initial phase of the HELOC when you can borrow funds while typically paying only the interest, is appealing for homeowners looking for temporary relief in monthly payments.
Risks Associated with a First-Lien HELOC
However, there are risks. Since it holds the first lien position, if you fail to make payments it could lead to foreclosure. Foreclosure is a serious consequence that usually results in the loss of your property. Once the foreclosure process begins, you may be forced to vacate, and the lender will sell your home to recover the debt owed.
Also, many HELOCs have variable interest rates, which could increase over time, complicating your ability to budget.
Pros and Cons of a First-Lien HELOC
Understanding the advantages and disadvantages of a first-lien HELOC can help you decide if it suits your financial goals.
Pros
Interest Savings on Mortgage
A 1st lien HELOC combines the existing mortgage loan with a line of credit, potentially reducing overall interest costs compared to taking out separate loans. This can benefit homeowners looking to optimize their home financing.
Access to Cash Without Selling Property
This financing option lets homeowners tap into their home equity without a full refinance, providing cash for projects or debt management while keeping their primary property intact.
Flexibility in Draw and Repayment Terms
First-lien HELOCs offer interest-only payments during the draw period and flexibility in repayment, allowing borrowers to choose amounts based on immediate needs and lower monthly costs.
Potential Tax Benefits
Interest paid on a first lien HELOC may be tax-deductible if used for home improvements, though it’s best to consult a tax professional for guidance.
Alternative to Refinancing
A first lien HELOC allows access to cash without fully resetting mortgage terms or adding to an existing mortgage, making it a practical alternative for homeowners looking to leverage home financing.
Cons
Risk of Foreclosure
Because the HELOC is in the first position, borrowers risk foreclosure if they default. Missing payments on this loan product can result in the loss of the property, so it’s important that you carefully plan.
Variable Interest Rates
HELOCs often come with variable interest rates, which can increase over time, affecting monthly payments and raising total costs. Unlike fixed-rate loans, monthly expenses could fluctuate depending on market conditions.
Impact on Credit and Equity
Using a first-lien HELOC reduces available home equity and can impact your credit score if payments are missed. Plus, taking on more debt affects the balance between debit and assets, which lenders consider in future applications.
Alternatives to a First-Lien HELOC
Considering other options is a wise move. Depending on your needs, alternatives to a first-lien HELOC may offer different advantages or more favorable terms, especially for home buyers and those focused on personal finance.
Second-Lien HELOCs
A second lien HELOC doesn’t replace your primary mortgage; instead, it’s paid off only after the main mortgage is settled. This option can come with slightly higher interest rates but doesn’t interfere with your primary mortgage.
Second-lien HELOCs are ideal for those who want to maintain their first mortgage while accessing additional funds.
Cash-Out Refinancing
With cash-out refinancing, you replace your existing mortgage with a larger one, cashing out the difference.**
This popular refinancing method lets you tap into your home equity but may not offer the same flexibility in repayments as a first-lien HELOC.
However, mortgage interest on cash-out refinances is often tax-deductible, making it a solid option for many.
Personal Loans as an Option
If you’re only looking for a smaller loan, a personal loan could work. Unlike a HELOC, personal loans don’t use home equity as collateral, which means they may come with higher interest rates and less favorable terms.
But sometimes you can bypass origination fees associated with home loans, which can be an attractive feature.
Home Equity Loan
A home equity loan is different from a HELOC because it provides a lump sum with fixed-rate interest, making it ideal for those who like predictable monthly payments over the flexible draw structure of a HELOC.
This type of loan offers stability, especially for homeowners in Texas as Texas has specific regulations around home equity loans that can affect terms.
Make Your Equity Count with the Right HELOC
A first lien HELOC can be a powerful tool, giving you the flexibility to use your home’s equity on your terms, whether you choose to use it for debt consolidation, home improvements, or personal investments.
With Rate’s HELOC options, you can easily access and manage your funds with flexible terms and competitive interest rates designed to fit your needs.
Ready to see how Rate’s HELOC can help you make the most of your home’s value? Explore your options here!
*Rate, Inc. does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
**Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate, Inc. for more information