If this is the first time you’ve heard of a first-lien home equity line of credit (HELOC), you’re not alone. This mortgage product allows you to use the equity in your home to take out a revolving line of credit. A first-lien HELOC is a specific type of HELOC that can replace your existing mortgage.
Understanding First-Lien HELOCs
A HELOC is a type of financing that homeowners can use to access the equity in their homes and is often used to help consolidate debt or fund home repairs. Typically, a HELOC is taken out as a secondary piece of financing in addition to a mortgage. The first-lien HELOC is a unique type of home financing that bundles a mortgage and a HELOC into a single debt.
How Does a First-Lien HELOC Work?
First, learn about liens. A lien on a home allows the lienholder to reclaim the property if the homeowner/borrower can’t repay the loan. When you take out a mortgage, the lender is the lienholder, and if you default on your mortgage, the lender has the right to claim the property.
HELOCs are usually in the second-lien position, acting as a “second mortgage.” This means that if the homeowner defaults on their mortgage and the HELOC, the mortgage lender’s lien must be satisfied before the HELOC will be paid off.
A first-lien HELOC replaces the homeowner’s mortgage. Because a HELOC is a revolving line of credit, you can withdraw funds from it to pay off the remaining balance of the original mortgage. Then you’ll enter the repayment period for the HELOC. As a revolving line of credit, you can continue to withdraw funds from the HELOC as you pay off your balance.
For example, say you have five years left on a 15-year fixed mortgage. You could take out a HELOC and use it to pay off the remaining balance of the original mortgage. As you pay off the HELOC, you’ll have access to funds that can be used to make repairs to the home or to fund other expenses. You could also take out a first-lien HELOC if you’ve paid off your mortgage and want to use your home as collateral for a revolving line of credit.
Pros and Cons of First-Lien HELOC
A first-lien HELOC can be useful in many situations. However, it’s not the right option for everyone. Consider the pros and cons before making your decision.
Pros
- Could offer lower interest rates than the original mortgage
- Draw period allows you to access funds for several years
- More flexibility than traditional mortgages
Cons
- Requires you to use your home as collateral
- Variable interest rates can make budgeting for repayments difficult
- Closing costs can get expensive
First-Lien HELOC Requirements
The requirements to qualify for a first-lien HELOC are similar to what you would need to be approved for a mortgage. Lenders’ requirements vary, but they will likely look for a credit score of 680 or higher and a debt-to-income ratio that does not exceed 45%.
How to Get a First-Lien HELOC
Step 1: Research lenders – If you’ve decided that a first-lien HELOC is right for you, the first step is researching lenders. Not all lenders offer first-lien HELOCs, so choose a few that do and compare them. Then you can pick the lender you want to work with.
Step 2: Apply – Apply to your chosen lender. Be sure to include all of the documentation required to process your application.
Step 3: Stay in contact – Your first-lien HELOC will go through the underwriting process. Be sure to stay in contact with your lender so you can respond to any requests for additional documentation promptly.
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How to Use a First-Lien HELOC
Are you wondering what to do with the money from a first-lien HELOC? There are several options.
Buy a New Home
Whether you’re a real estate investor or a homeowner looking to move, you can use a first-lien HELOC to help you purchase a new home. After receiving your HELOC, you can use the line of credit to cover the down payment — or even the total cost — of your new home.
Home Renovations or Improvements
A HELOC is a great way to finance home renovations or improvements. After receiving your HELOC, you’ll put the money toward the work you’re doing on your home.
Debt Consolidation
To use your HELOC for debt consolidation, you would use the funds to pay off other outstanding debts. This could include personal loans, credit card debts and other types of debt.
Investment Opportunities
A first-lien HELOC is a popular option for real estate investors. You can use the equity from one home to get a HELOC and then use those funds to purchase another home outright or as a down payment.
Alternatives to First-Lien HELOCs
No matter what your goal is for the money, there are alternatives to first-lien HELOCs to consider. Be sure to review all of your options before moving forward.
Home Equity Loans
A home equity loan is similar to a HELOC in that both allow you to borrow against the equity in your home. The loan, however, provides you with a lump sum instead of the revolving line of credit that a HELOC provides. They are second-lien loans, which can make them a better option for some people.
Cash-Out Refinance
A cash-out refinance allows you to refinance your home with a larger loan amount. It replaces the existing mortgage, and you get to keep the difference between the new mortgage amount and the original mortgage amount. This can be a good way to get funding without entering into a revolving line of credit.
Personal Loans
A personal loan doesn’t impact your current mortgage and does not place a lien on your home. Personal loans are available in a variety of loan amounts and repayment terms. They can be a good option if you are happy with your mortgage and don’t want to refinance or place another lien on your home.
Is a First-Lien HELOC Right for Me?
First-lien HELOCs are unique mortgage products that you can use to gain access to additional funds. To determine whether it’s right for you, consider what you want to use the funds for and whether you feel comfortable using your home as collateral. It’s also important to consider the alternatives to determine which is the best fit for your situation.
Frequently Asked Questions
Can I deduct interest from a first-lien HELOC on my taxes?
Yes, you can deduct the interest from a first-lien HELOC on your taxes.
What is the maximum loan-to-value ratio for a first-lien HELOC?
It varies by lender, but most lenders will allow a maximum of 80% to 85%. You should plan to have at least 15% to 20% equity in your home if you plan to apply for a first-lien HELOC.
How quickly can I access funds from a first-lien HELOC?
This depends on how long the closing process takes, but it’s less than 60 days.