First-lien HELOCs: What You Should Know

During your exploration of the home finance world, you have likely encountered something called home equity financing. But what is home equity financing? A home equity line of credit, or HELOC, is a trusty source of funding that helps homeowners access the equity in their home. And whether those homeowners use that money to help consolidate debt or finance a renovation or repair, they’ll enjoy greater flexibility (and often better rates) than other funding sources.

We cover many of the benefits and drawbacks of borrowing home equity in other articles, so please feel free to learn more here and here. But in this article, we’ll focus on one particular type of HELOC — the first-lien HELOC.

What is a first-lien HELOC?

Well, we know what a HELOC is. What’s a lien? A lien is a legal claim over a piece of property in place until a debt is repaid. Basically, the person or institution claiming the lien has a right to the property if its debt is not paid back. So then, a first lien is a “first claim” — the first right to the property if its debt is unpaid. 

A first-lien HELOC allows homeowners to access their home’s equity by offering a financial institution the first claim to the property if it’s unpaid. Just like a mortgage. That’s why you can think of a first-lien HELOC as a combination between a mortgage lien and a line of credit. It will replace your original mortgage, allowing you to access the equity you’re paying into. First-lien lenders will often frame this type of loan as a flexible option to a traditional mortgage. Kind of a best of both worlds situation. But does that hold up?

First-lien vs. second-lien HELOC

If a first-lien HELOC replaces a mortgage, that would mean a second-lien HELOC is in addition to that original mortgage. This is the classic home equity line of credit we were talking about at the beginning of this article. Calling it a second-lien HELOC is just a helpful way to compare it to a first-lien HELOC. That also helps explain why sometimes a HELOC is referred to as a second mortgage. They’re also sometimes called “second-position” liens (a first-lien HELOC can be called a “first-position lien”).

Now, when you’re comparing a first-lien HELOC to a second-lien HELOC, there are a couple key differences to keep in mind. A first-lien HELOC replaces a mortgage entirely. A second-lien HELOC must be paid in addition to your traditional mortgage. A first-lien HELOC lender gets priority access to your property if the debt’s not paid in full. A second-lien HELOC gets settled after a first-lien is taken care of, making it a less risky option. It may help to think of a first-lien HELOC as a type of refinance and a second-lien HELOC as secondary financing using equity in your home. Both types let you access the equity in your home for whatever you need.

Leveraging a first-lien HELOC

By now you might be wondering, what exactly is the benefit of a first-lien HELOC? Why would someone choose an alternative that seems more risky to a classic mortgage or home equity line of credit? The first reason is convenience. You can withdraw cash freely from the same account you’re using to pay down your home, making it easy to keep track of. You’re also only dealing with one lender — everything home-finance related, all in one place.

On a more technical level, you can potentially save on interest over time because of the way the amounts are calculated. Contribute more toward your interest payments, and not principal, and you may be able to enjoy some serious savings.

And of course, the main draw is, well, your ability to draw. Need to cover an emergency expense? Want to remodel the bathroom? Looking to pay down high-interest credit card debt? You can potentially take it right from your home’s equity. 

Should I apply for a first-lien HELOC?

If you’re looking to buy a new house or refinance the one you’re in, a first-lien HELOC can be an interesting option worth exploring. The simplicity, flexibility, and potential to save on interest are all solid reasons to go this route. However, there are risks and rewards involved and you should discuss all your available options with your lender.