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What is a First Lien HELOC?

You probably heard about HELOC or second mortgage, but few people know they can take something that is called a first lien HELOC. So what are HELOC and first-lien HELOC, and what are the main differences?

What is a first lien HELOC? A first-lien HELOC is similar to a home equity line of credit (HELOC) or second mortgage. Only, with first-lien HELOC, you are putting HELOC in the first lien position, replacing your mortgage with HELOC.

House and mortgage sign

1st lien HELOC lenders combine credit and mortgage in one, and it has become more and more popular among modern homeowners who wish to pay off their mortgages faster and without much hassle. Let’s find out more about what is a first-position HELOC.

What Is the First Lien HELOC and How Does It Work?

A first-lien HELOC works like a line of credit and mortgage in one. With the first lien position HELOC, you will basically replace your existing mortgage by refinancing it.

The first line HELOC also works like an ordinary line of credit or checking account. Meaning you will have money at your disposal to spend on whatever you want.

What is important to explain is that with first-lien HELOC, you will pay only monthly interest on the balance, while if your HELOC is in second place, you will pay that as well as your monthly mortgage payments.

Main Differences Between Second Lien Heloc and 1st Lien Heloc?

Second-lien HELOC is what people refer to when talking about the Home Equity Line of credit. HELOC is usually called a second mortgage, even though it is not a mortgage.

It looks more like regular credit where you put your home equity as collateral. Once you are approved for a mortgage, a monthly payment will be calculated, and if you take HELOC, these payments will remain on top of the new obligations you will have with HELOC.

But if you refinance your mortgage and replace it with first-lien HELOC, you will only have to pay that. Also, we should mention that the first-line HELOC is excellent if you wish to pay off your mortgage faster.

By putting your HELOC in the first lien, you will reduce the risk of default. Another big difference between second and first-lien HELOC is the amount you will be able to get.

For example, if your home is worth $300,000 and you paid $100,000, it means your equity is $200,000. But the bank will give you 80% financing of the value of $240,000, which leads us to a $40,000 HELOC.

While the amount is larger with first-lien HELOC, it looks something like this.

Second Lien HELOC:

  • Home value: $300,000
  • $300,000×80% = $240,000
  • Amount owed $200,000
  • $240,000-$200,000 = $40,000 of HELOC

First lien HELOC:

  • Home value: $300,000
  • Mortgage balance: $200,000
  • $300,000×80% = $240,000
  • You will get HELOC balance of $200,000
  • Line of credit of $40,000

How to Get the First Lien HELOC Mortgage? 

The process of getting a first lien HELOC is exactly the same as getting a refinance of your mortgage. The first thing to do is to find the most suitable first-lien HELOC banks that will ensure all of your requirements are met. You will have an appraisal of the home, FICO check-up, income, and financial checkups, as well as your debt to income ratio so the lender can see if you are able to pay for this credit.

Here are the criteria you will meet to get HELOC:

  • A certain percentage of equity in your home,
  • Good credit (680 or more),
  • Low debt-to-income ratio (DTI),
  • Sufficient income,
  • Reliable payment history.

Differences Between Home Equity Loan and the First Lien HELOC

As you know, there is something called a Home Equity Loan, and it’s usually confused with a HELOC. And even though there are some similarities, there are much more differences.

For starters, HELOC is more flexible and you have an amount you can spend for a longer period until the draw period is over. Here are the main differences between Home Equity Loan and HELOC.

Home Equity LoanHELOC
You will get lump-sum amount at onceRevolving credit line for a pre-approved amount
Fixed monthly paymentsinterest-only payments
Fixed interest ratesAdjustable mortgage rates

Is Cash-Out Refinance a Better Option?

If you wish to get to a certain amount of money, there is a third option you can use. It is called a cash-out refinance, and it’s something your mortgage broker can advise you on and fix you up with the best deal.

So how does cash-out work? With cash-out refinance, you will write off your mortgage by taking another one for a higher rate. You will basically then take that new mortgage to pay off the old one and keep the difference.

That only pays off if you have significant equity in your home. This difference will be available for your expenditure in a lump sum. 

Suburban home with a garage 

Who Are the Best First-Position HELOC Lenders?

There are many lenders that offer first-lien HELOC you can choose, but which one is the right one for you? In the table below you’ll find some of the most rated ones.

Lender Max LTVMin. credit score
Guaranteed Rate 90%640
PNC Bank90%680

Check Some of the Features the Best First Lien HELOC Lenders Should Have

Choosing one of the 1st position HELOC lenders can be a bit challenging if you don’t know what criteria to look at. So, here are some of the most important ones you definitely need to have in mind if you want to pick the best among many first-lien HELOC lenders:

  • Types of loans,
  • Down payment requirements,
  • Mortgage rates,
  • Cost and fees,
  • Face-to-face services,
  • Credit score flexibility,
  • Prepayment penalties.

Should You Replace Your Mortgage With 1st Lien HELOC?

Want to replace mortgage with HELOC but not sure whether it’s the right thing to do? As we mentioned earlier, putting a first lien HELOC is much safer than taking regular HELOC. This type of refinancing is great because it allows you to pay your principal sooner.

In fact, a HELOC can be a great solution for almost everything, which means you can also use first-position HELOC to pay off mortgage in full or in part. After receiving approval for a HELOC, you might completely pay off the mortgage and then use the HELOC as a payment option instead of your mortgage.

But, what about first-position HELOC rates? Still, it is not a good option if you are not certain you will have significant cash flow and income. With HELOC, you will have adjustable rates that can be unpredictable.

On the other hand, if you wish to have a house, pay your mortgage, and have access to a certain amount of cash, this is way better than taking regular credit cards because you will pay less interest with HELOC.