Home equity lines of credit (HELOCs) are a popular way for homeowners to tap into the equity they’ve built up in their homes. A HELOC is essentially a revolving line of credit that uses a home as collateral. Borrowers can draw on the line of credit as needed, up to a predetermined limit. HELOCs are typically second mortgages, meaning that they are subordinate to the first mortgage on the property. However, there is another type of HELOC called a first-lien HELOC, which is becoming increasingly popular.
In this article, we will explore the concept of first-lien HELOCs and how they work.
What is a First-Lien HELOC?
A first-lien HELOC is a type of HELOC that is secured by a first mortgage on the property. In other words, the lender providing the first-lien HELOC is in first position when it comes to recouping their investment in the event of default. This is in contrast to a traditional HELOC, which is usually a second mortgage and is subordinate to the first mortgage. First-lien HELOCs are also known as hybrid HELOCs or piggyback HELOCs.
How Does a First-Lien HELOC Work?
To understand how a first-lien HELOC works, it’s helpful to first understand the basics of a traditional HELOC. A traditional HELOC is a revolving line of credit that uses a home as collateral. Borrowers can draw on the line of credit as needed, up to a predetermined limit. The borrower only pays interest on the amount borrowed, and payments are usually interest-only for a set period of time. After that period, the borrower must begin making principal and interest payments on the outstanding balance.
A first-lien HELOC works in much the same way, with a few key differences. The primary difference is that the first-lien HELOC is secured by a first mortgage, which means that the lender providing the HELOC is in first position when it comes to recouping their investment. This added security means that the borrower can typically qualify for a larger line of credit than they would with a traditional HELOC. Additionally, first-lien HELOCs often have lower interest rates than traditional HELOCs, as the lender is taking on less risk.
The Many Advantages Of First-Lien HELOC
A first-lien HELOC offers several advantages to homeowners who want to access the equity in their home. One of the most significant advantages is that it allows borrowers to tap into their home’s equity without refinancing their first mortgage. This can be a huge benefit for borrowers who have a low interest rate on their first mortgage and don’t want to lose that rate by refinancing. By using a first-lien HELOC, borrowers can access their home’s equity while keeping their first mortgage intact. This can also save borrowers time and money since they won’t have to go through the refinancing process, which can be time-consuming and expensive.
Another advantage of a first-lien HELOC is that it typically offers lower interest rates than other types of loans, such as personal loans or credit cards. This can be a huge benefit for borrowers who want to consolidate high-interest debt or fund a large expense, such as a home renovation. By using a first-lien HELOC, borrowers can access a lower interest rate and potentially save thousands of dollars in interest charges over the life of the loan.
Finally, a first-lien HELOC offers borrowers a great deal of flexibility when it comes to accessing their home’s equity. Unlike a traditional home equity loan, which provides a lump sum of cash upfront, a first-lien HELOC allows borrowers to draw on their line of credit as needed. This means that borrowers can access their home’s equity in smaller increments, which can be a more cost-effective and manageable way to finance expenses over time.
Who Should Consider a First-Lien HELOC?
A first-lien HELOC can be a good option for borrowers who have a lot of equity in their home and want to access that equity without refinancing their first mortgage. It can also be a good option for borrowers who have a high credit score and a low debt-to-income ratio, as these factors may help them qualify for a larger line of credit and a lower interest rate. Finally, a first-lien HELOC can be a good option for borrowers who want to consolidate high-interest debt or fund a large expense, such as a home renovation.
How to Apply for a First-Lien HELOC?
The process for applying for a first-lien HELOC is similar to the process for applying for a traditional HELOC. The borrower will need to provide documentation of their income, assets, and debts, as well as information about their property. The lender will also order an appraisal to determine the current value of the property. If the borrower meets the qualifications, they will be approved for a line of credit, and the funds will be available for them to draw on as needed.
How to Repay a First-Lien HELOC?
Repaying a first-lien HELOC is similar to repaying a traditional HELOC. The borrower will make interest-only payments for a set period of time, typically 5 to 10 years. After that period, the borrower will need to begin making principal and interest payments on the outstanding balance. The length of time the borrower has to repay the balance will vary depending on the terms of the loan. Some lenders may offer a fixed repayment period, while others may allow the borrower to repay the balance over a longer period of time.
Takeaways
First-lien HELOCs can be a good option for homeowners who have a lot of equity in their home and want to access that equity without refinancing their first mortgage. They can also be a good option for borrowers with a high credit score and a low debt-to-income ratio. However, it’s important to carefully consider the borrower’s individual circumstances before deciding between a first-lien HELOC and a traditional HELOC. Borrowers should also be aware of the potential drawbacks of a first-lien HELOC, such as higher fees and less flexibility when it comes to refinancing or selling their home.
