We sold our last home two years ago.
We were using a HELOC as a first mortgage, and I loved it.
I love using a HELOC as a first mortgage because the costs are lower, and my loan balance can increase or decrease rather than be fixed.
In this article, I’ll share what we learned from it and why we’re about to do it again (I just applied for our next one).
I was able to borrow money as I needed it, the interest rate was fixed, and I paid $0 to get the loan in place —- Whhhhaaaaa?!?!?!
Yep, you heard that right.
Try that one with a traditional mortgage product!
But Wait, Can You Even Use a HELOC Instead of a Mortgage?
The short answer is yep!
In a traditional mortgage situation, a borrower gets a mortgage when they purchase their home.
Then they might later get a home equity line of credit (HELOC) in order to later make some home improvements.
They’re able to get the HELOC once they build up some equity in their home.
Your mortgage is in the first lien position, and your HELOC is in the second lien position.
So the HELOC is a second mortgage.
If you ever want to remove your mortgage, you have to first pay off the second mortgage and then the first mortgage.
What’s interesting is that the way that a HELOC is typically used, they have low to no closing costs.
That’s why using a HELOC as a first mortgage can be an interesting move.
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We Paid $0 In Closing Costs For Our HELOC Loan.
Often, HELOCs (home equity lines of credit) will cover the closing costs for your loan.
You may have to pay for an appraisal which is common.
But we discovered using a local credit union for our home loans.
Not only do they have lower interest rates than your average banks or mortgage broker, but often they will run specials that will allow you to take these loans with no cost to you.
Because credit unions are member-owned, their goal isn’t to make money from fees.
Their goal is to make safe loans for their members in the community.
Well, the Credit Union America’s First was running a special where even the appraisal was covered as long as we took out a $25,000 loan at closing.
We wrote a check for the appraisal, but they never even cashed it.
They just voided it at closing.
A HELOC is Flexible Like Other Revolving Lines of Credit
With a fixed interest rate loan (rather than using variable interest rates), you’re required to take out a set amount of cash and pay it back over time.
Let’s say I buy a house worth $200,000 — I might put 40k down and take out a loan for 160k.
But let’s say instead, I already have the home worth $200k.
Maybe I inherited it.
Or maybe I’ve owned it for 15 years and no longer have a mortgage, or maybe that mortgage amount is a low amount, like $30k.
Maybe I want access to capital, but I don’t want to have to borrow 160k or more.
With a HELOC, I might be approved for the $160k, but I don’t have to use the cash.
I just got access to it.
Or if I had that $30k mortgage, I’d get approved for a HELOC at $160k and take out a loan of $30k to pay off my current mortgage.
But then I’d have access to an additional $130k to use as I please.
Maybe I want to build an addition to my home.
Or maybe I need to replace my HVAC system or the roof.
You could even (responsibly) use your HELOC for other items.
Your HELOC is secured using your home as collateral, so the lender is comfortable.
Home Equity Loans are Creative
I like anything that’s a bit different (if you’ve learned anything about me, it’s that I prefer to blaze my own trail).
Using a HELOC as the primary form of financing on a home is definitely ‘Destroy the Box’ behavior.
And I’m all about it!
Having the flexibility to pull from a line of credit but then pay it back as I please is comforting.
How to Pull off This Home Equity Line Magic Trick
Yes, this is an advanced borrower strategy.
If you barely have 10% to put down on a home purchase or if you’re a first-time home buyer, this probably isn’t the right move for you.
But, if you have significantly paid down your home loan balance and you’re looking for a new strategy, this might be a great tool to add to your toolbox.
Folks talk about being debt free.
I think that’s great.
But it’s also important to have instant availability to cash should you need it.
That’s why I think it’s a savvy financial move to take a home that you have major equity in and attach it to a giant credit card (HELOC).
And just like a credit card, you can set it on auto-pay should you need to tap into the cash machine.
Now, my HELOC strategy might leave you with some questions, so let’s answer those here.
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Why I Prefer Using a HELOC as a First Mortgage – FAQs
Home Equity Loan vs HELOC -What’s the difference?
Both are loans that tap into your home equity in order to provide you access to capital. They both use your home as collateral for the loan amount.
The biggest difference is that the home equity loan is a fixed amount that is borrowed with a fixed interest rate.
The HELOC is a revolving credit line, and you can pay it back and borrow from it as you please.
The interest rate can be variable or fixed (usually my preference).
Is it Better to Pay Off HELOC or Mortgage First?
Well, remember above when I talked about the traditional mortgage being in the first position and then having a HELOC as a second mortgage?
If this is your setup, then the loan that you have in the second position has to be paid off before you can pay off the existing mortgage that’s in the first position.
If you wanted, you could get an entirely new loan.
This is a strategy when consolidating debt into a single loan.
In this case, you would take a first mortgage and a second mortgage and just replace them with one single new loan (a new first mortgage).
Is a HELOC Considered a First Mortgage?
The short answer is: it depends.
If you take out a HELOC as a primary loan and you don’t already have a mortgage in place, then it’s the first mortgage.
If you already have an existing mortgage in place, then it’s in the second position or a junior lien position.
In that case, it’s a second mortgage.
Why Use a HELOC Rather Than Traditional Mortgage?
I have found that the costs of a HELOC are usually lower than that of a traditional mortgage.
In my experience, I’ve been able to get a mortgage with minimal costs, sometimes only paying a few hundred dollars for the legal recording costs of the paperwork, and that’s it.
This is nuts. If you get a normal mortgage, you’re probably using a mortgage broker.
They have a file for you and will make the loan happen.
They often help get you a loan that conforms or fits in a box – maybe an FHA loan or a loan that meets the Fannie Mae or Freddie Mac guidelines.
Well, that broker needs to get paid. So there will be points for creating your loan.
Points (or the mortgage broker fee) are how they make their money.
And that’s why I typically prefer a credit union for my loans (keep reading below).
Where is the Best Place to Get a HELOC?
My secret sauce is a credit union. Why?
Credit unions are member-owned.
They’re not profit-driven. In fact, they’re a non-profit structured entity.
What this means is that they typically have the lowest interest rates of any lending institutions out there.
Now, choosing a credit union can be strange, as some are targeted toward specific citizens or worker types.
But many are open to an entire community.
Some will feel mom and pop, but I prefer the ones that have a great tech stack so that I can easily log online and make automatic loan payments.
As a side note: credit unions are also great places to go if you want to finance a vehicle.
How Does the HELOC Payback Period Work?
This can be interesting, as the loan terms on a HELOC are a bit different.
While the loan can be at a fixed rate or a variable rate, their terms are different.
Many times they have a draw period.
For example, the HELOC I’m applying for now is a fixed rate loan (they often come in a variable interest rate as well), but I’m able to draw and use the line of credit for a period of 10 years.
After that, the loan turns into a term loan.
This means that any balance that I have left at that point will turn into a traditional loan with payments and interest, and I’ll no longer be able to use the loan as a revolving line of credit.
But I feel that ten years is a long time, so I’m perfectly fine with this.
How Much of a HELOC Can I Get?
The most standard answer is a loan with a loan value of 80%.
So if your house is worth $100, the lender will allow a HELOC up to $80.
Sometimes a lender will go up to 90% LTV (loan to value), but I wouldn’t recommend this.
Just because a lender will allow you access to cash doesn’t mean it’s the best move for you financially.
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