First Lien HELOC: Complete Guide and Top Lenders

A first lien HELOC can be a powerful tool for homeowners, allowing them to tap into their home's equity for renovations, debt consolidation, or other financial goals.

You can borrow up to 80% of your home's value with a first lien HELOC, but be aware that this can leave you with a significant amount of equity tied up in the loan.

The interest rates on first lien HELOCs are often variable, meaning they can change over time, but some lenders may offer fixed rates for a certain period.

Homeowners can expect to pay origination fees, which can range from 0.5% to 2% of the loan amount.

A first-lien HELOC is a type of all-in-one home financing that bundles your mortgage and HELOC as first-lien debt.

This means that if you have a mortgage and a HELOC, a first-lien HELOC would merge them into a single loan, making it a first-lien position.

A lien on a home is a claim that gives an individual or entity the right to reclaim the property if a borrower can’t repay the loan. This is typically the case with a mortgage, which sits in the first-lien position.

In the event of a default or foreclosure, the first-lien debt holder gets paid before all other debt holders – except tax authorities.

A HELOC is usually in the second-lien position, making it a second mortgage. This means it's only paid off after the first lien is satisfied.

This is why a first-lien HELOC is often considered a safer option, as it prioritizes the lender over other lenders for loan repayment.

A first-lien HELOC can be a smart financial tool for homeowners with significant equity in their homes. It allows you to access a larger pool of funds than a regular HELOC would.

You can use the funds for various purposes, such as home improvements, emergencies, or other needs. Chad Smith, president and chief operating officer of Better Mortgage, says, "If you worked hard and created a bunch of equity in your home and you want to have access to cash or home improvements, emergencies or other needs without having to refinance, you know, it’s just there for you."

A first-lien HELOC can also function as a mortgage prepayment strategy. Logan Hertz, founder of Hazeltine, notes, "The HELOC is a two-way street. If you have a mortgage, it would not be a good idea to dump your entire income into the mortgage because you can’t pull it back out. Whereas here, you can safely do that."

Here are some key benefits of a first-lien HELOC:

To get a first-lien HELOC, you might be able to use the funds from the HELOC to pay off your mortgage, making the HELOC the first lien and replacing the mortgage.

You can also get a first-lien HELOC if you've already repaid your original mortgage in full, leaving the HELOC as the only outstanding debt and the first lien on the home.

There are two main instances where you might be able to get a first-lien HELOC:

In both cases, you can draw against your home's equity as needed, and you might also get the benefit of a mortgage interest deduction.

A first-lien HELOC works by replacing your mortgage, becoming the primary loan on your property, and allowing you to access funds continuously throughout the 30-year term.

You can link a checking account to your first-lien HELOC, and a "sweep" feature automatically applies funds to the HELOC balance when you receive your paycheck. This allows you to tackle paying down the principal every time you deposit your paycheck, saving you on interest.

You don't have the usual fixed payment of principal and interest each month, as you do with a traditional mortgage. Instead, you pay at a variable rate, with the interest calculated using the previous month's average daily principal balance.

You can use a first-lien HELOC to pay off your remaining mortgage balance, making the line of credit your new mortgage or first lien. This can be done even if you've paid off your mortgage and own your home outright.

There are two main ways to get a first-lien HELOC:

To qualify for a first-lien HELOC, you'll need to have a FICO score of at least 680, a debt-to-income ratio no higher than 45 percent, and ample reserves and stable income to make the payments and handle any interest rate fluctuations.

Here are some benefits of a first-lien HELOC:

Note: The table below summarizes the key features of a first-lien HELOC:

We take a rigorous approach to selecting the best first-lien HELOCs for our readers. Since 2018, we've evaluated home equity companies to help you find the right loan.

Our analysis reviewed 850 data points from 34 lenders and financial institutions. We gathered this information from company websites, online applications, public disclosures, customer reviews, and direct communication with company representatives.

We don't believe two companies can be the best for the same purpose, so we only show each best-for designation once. This ensures you get a clear picture of your options.

We collected 25 data points from each lender to get a comprehensive understanding of their services. This detailed research helps us provide you with accurate information.

A first-lien HELOC has two separate phases: the draw period and the repayment period. During both phases, you'll make payments on the HELOC.

The repayment period is similar to an installment loan, where you'll make monthly payments that cover principal and interest. This is in contrast to traditional mortgages, which have a fixed principal and interest payment over the term of the loan.

You can repay the HELOC at regular, advantageous intervals, such as when you receive your paycheck. This can be done automatically through a "sweep" feature, which links your checking account to the HELOC and applies funds to the HELOC balance.

Here are some key repayment details:

You'll typically pay interest at a variable rate, calculated using the previous month's average daily principal balance. This can be beneficial if you're able to pay down the principal regularly, reducing the amount of interest you owe.

A HELOC has two separate phases: the draw period and the repayment period. You'll make payments on the HELOC during both periods.

During the draw period, you can use the HELOC like a credit card, withdrawing funds up to its credit limit. This phase can last for a set period, such as 10 years, or until a certain amount is borrowed.

Once the draw period ends, the line of credit will enter its second phase, the repayment period. During this phase, you'll make monthly payments that cover principal and interest, like an installment loan.

You can use a HELOC to pay off your remaining mortgage balance, making the line of credit your new mortgage or first lien. This can be a convenient option if you need to make ongoing home improvements or pay for high-interest debts.

A first-lien HELOC gets repaid first, unlike a traditional HELOC which sits in the "second position" behind your primary mortgage. This means that if you default on the loan, the first-lien HELOC will be repaid before the primary mortgage.

The repayment period for a first-lien HELOC can vary, but some options include 5, 10, 15, or 30 years. You can also repay the HELOC at regular, advantageous intervals, such as when you receive your paycheck.

Here's a breakdown of the repayment terms for a first-lien HELOC:

Keep in mind that the repayment terms may vary depending on the lender and the specific HELOC product you choose.

Interest calculation can have a significant impact on your loan payments. The way your loan calculates interest can affect how much interest you pay, just as much as the interest rate or more!

Traditional mortgages calculate interest using an amortized interest calculation, which uses your previous month's balance to calculate your next month's interest payment. This method can't change regardless of your balance throughout the month.

HELOCs, on the other hand, calculate interest using the average daily balance, which can lead to significant interest savings. By decreasing your balance, even at a daily level, your interest payment decreases overall.

Each payment you make on a HELOC reduces your principal balance, maximizing your interest savings. This is especially true when you route all of your income to pay down your HELOC.

A first-lien HELOC can be a convenient way to access your home equity, but it's essential to consider the risks and explore alternative options. Luckily, homeowners have a few alternatives to dip into their equity or take out a loan to fund home improvements or cover expenses.

To make an informed decision, it's crucial to understand the differences between a first-lien HELOC and a traditional mortgage. A first-lien HELOC has several key differentiators, including allowing money to go in and out freely, calculating and earning interest on the average daily balance of the period, and offering interest-only payments until the end of the loan term.

In contrast, a traditional mortgage is a rigid financing obligation, requiring consistent payments toward interest, principal, and escrow. This can be a significant drawback for homeowners who need flexibility in their financial planning.

If you're considering a first-lien HELOC, it's essential to weigh the pros and cons. Some benefits include access to a flexible credit line, lower interest rates, and longer draw periods. However, there are also disadvantages, such as the risk of accumulating debt and the potential for balloon payments at the end of the loan term.

To get the best rate for a HELOC, shop around and compare lenders to find an attractive deal. If you can't find a lender that offers a competitive rate, it may be a sign that you need to improve your credit score before applying.

Here are some scenarios where a first-lien HELOC may be a better solution than a traditional mortgage or second mortgage:

In these cases, a first-lien HELOC may offer more favorable interest rates and easier qualification requirements compared to a second-lien HELOC.

A first-lien HELOC can be a great financial tool for the right homeowner. You might consider using it to pay off the remaining balance on your first mortgage loan.

Homeowners nearing the end of their mortgage term may also benefit from a first-lien HELOC, as it can help them maximize any remaining mortgage interest deductions they're able to claim.

First-lien HELOCs are often easier to qualify for than second-lien HELOCs, and they may offer more favorable interest rates.

You can use a first-lien HELOC to access a flexible credit line via debit card, paper checks, or electronic transfers to a bank account.

Other potential benefits of a first-lien HELOC include lower interest rates, longer draw periods, less stringent credit requirements, and higher borrowing limits.

Here are some scenarios where a first-lien HELOC might be especially useful: