The ability to develop equity with time is one of the biggest perks of house possession, which you can use to secure low-rate payments in the form of a second mortgage, no matter if it is a home equity line of credit, i.e., HELOC or one-time credit.
You must have heard of the term HELOC mortgage or loan, which is typically known as a second loan. If you hold a house, you can invest your home as security for another mortgage. It provides you access to substantial payments. Although it is called a second loan, so you also need to make a repayment schedule to pay a separate amount of installments other than your loan.
However, HELOC can also be inscribed in the first lien position in which no second mortgage or separate installment is required.
Let’s explore the term First-Lien HELOC, and its requirements in detail to know everything about it.
What is First-Lien HELOC?
If you are familiar with the term HELOC, it would be easier for you to identify this term as well. People use HELOC for multiple yet valid purposes such as refinancing, house renovation, or higher studies.
Usually, a HELOC is considered a second loan, and it is evident that you cannot acquire a second loan until you have the first debt. Yet, with the HELOC that is positioned on the first lien, you can use the amount of this loan to pay off your first debt.
In simpler words, if you own a home worth $100,000, which you purchased through a conventional loan. Now that you have $80,000 of your home loan and $20,000 are remaining, in that case, if you obtain a first-lien HELOC, you can use that money to pay off your first mortgage. Once you have paid all installments of your first loan and got rid of it, the first-lien HELOC would become your first mortgage.
Are you still confused about the term? Let’s discover how First-Lien HELOC works and its criteria you need to meet.
How the First-Lien HELOC Works?
The first-lien HELOC is a home equity line of credit at first place, which typically works by interchanging with your existing or first loan and taking over its position. However, this loan type works just like the home equity loan.
The debtors are allowed to apply deposit directly to the lender, reduce the mortgage interest rate and home loan period. You can also renounce money for your 30-year debt period in the form of a home equity loan without refinancing it.
People adopt this option to quickly pay off their home loans and develop home equity fast because they can extend their installments as they want.
The first-lien HELOC delivers many benefits, and one of the most significant advantages is that if you are not a landlord, you can finance the first-lien HELOC to purchase a new home. In this manner, your personal banking and home financing would be merged into one fluid financing equipment.
Requirements of First-Lien HELOC
You must consider its requirements before acquiring a first-lien HELOC and determining whether you’re eligible to obtain this mortgage.
Before approving your first-lien HELOC application, your creditor would see your home equity, credit score, and loan-to-value ratio.
Home EquityYou can easily calculate your home equity value by taking the current market rate of your home and deduct that amount you own from the estimated value. For instance, if you hold a house that worth $100,000 and you owe $20,000, it means your home equity worth is $80,000. |
Loan-to-Value RatioBesides, your creditor would use your loan-to-value ratio to comprehend how many portions of this value you can take. You can discover the LTV ratio by dividing the amount of debt you acquired by your home’s rate, which means your LTV ratio would be 20%. |
Down Payment of First-Lien HELOC
The down payment approach in the first-lien HELOC involves establishing your existing home’s equity and holding several debts at one time. You can use HELOC as a down payment on your next house. Well, the HELOC down payment doesn’t provide much profit to the debtor. Therefore, it is recommended to work with a creditor who has your ideal mortgage rate in mind.
Other Options to Pay your First Mortgage
In case you do not want to get indulged in the HELOC system, you can discover several other options which provide similar benefits of HELOC yet with distinct requirements.
Cash-Out Refinance |
Home-Equity Loan |
| A cash-out refinance works by inscribing your current loan into a new loan at a higher rate. Although it depends upon the amount you owe, it enables you to pay off your present debt and get the difference between the two loans in one amount. This option is helpful because you only have one loan rather than two, and you get your refunds at the same time instead of getting access to the credit line. | This is one of the most popular debt options, which many people may confuse with the HELOC because both debt types are considered as a second loan. However, a HELOC is more convenient and simplified, which lets the borrower use his home’s rate in the precise amount he requires. Nonetheless, a home equity loan gives you a total amount of withdrawal. |
Final Thoughts
The first-lien HELOC has many features that make them unique and more valuable than other home equity options. This option provides more convenience and advantages to paying off your first mortgage with easy installments and interest rates. Besides, the repayment period can also be extended upon your application so that you could repay your payments effortlessly. Moreover, you can jump on the payments at the beginning of the new repayment time. It means, if the amount is adequately high, it can cause your financial challenges to default, and you would be at risk of losing your house.