What a first lien HELOC is
A first lien HELOC is a home equity line of credit that holds the first-lien position on your home, usually because it paid off the mortgage. Home equity loans and lines are usually second liens, but the OCC's examiner handbook notes that a home equity loan may be a first-lien loan, and that collecting on a first-lien line then closely resembles collecting on a first mortgage.[1] Everything else about it is still a HELOC: a variable rate made of an index and a margin,[3] a draw period with interest-only minimum payments, then repayment.[1]
| 30-year fixed mortgage | First lien HELOC | |
|---|---|---|
| Rate | Fixed for the term | Prime + margin, changes with prime |
| Minimum payment | Principal + interest from month one | Usually interest only during the draw |
| Paying extra | Shortens the loan; money is gone | Lowers the balance; can be drawn again |
| Rate limit | None needed | A lifetime maximum must be stated; periodic caps are uncommon |
| Lender can freeze the line | Not applicable | Yes, in limited cases such as a big value drop |
Regulation Z requires a variable-rate plan secured by a dwelling to state a maximum interest rate,[4] but bank supervisors note that HELOCs generally do not cap how much the rate can rise from one period to the next.[2] The lender may also freeze or cut the line in specific situations, such as a significant decline in the home's value.[5]
Does a first lien HELOC pay off faster?
A first lien HELOC pays off faster only if its rate is lower or you put more money toward it; the line itself does not speed anything up. The table pays off the same $200,000 with the same monthly outlay:
| Scenario | Monthly outlay | Paid off in | Total interest |
|---|---|---|---|
| 30-year fixed at 7.11%, regular payment | $1,345 | 30 yr | $284,349 |
| 30-year fixed at 7.11%, paying $1,845 | $1,845 | 14 yr 7 mo | $121,057 |
| First lien HELOC at 7.50%, paying $1,845 | $1,845 | 15 yr 2 mo | $135,114 |
| Same HELOC with $4,000 average cash parked in it | $1,870 | 14 yr 10 mo | $131,341 |
| First lien HELOC at 6.50%, paying $1,845 | $1,845 | 13 yr 8 mo | $102,167 |
At 7.50% the line takes 7 mo longer than a fixed loan at 7.11% with the same payment, and costs $14,057 more.[6][7] Only a lower rate (the last row) makes the line clearly cheaper, and a variable rate can move either way.
The parked-cash argument, worked out
Sellers of "all-in-one" plans point out that a paycheck deposited into the line lowers its balance until you spend it. The saving is real but small: it equals the average amount parked times the rate. If an $8,000 monthly paycheck lands on the first and is spent evenly through the month, about $4,000 sits in the line on average.
Interest saved per month = average cash parked × rate ÷ 12$4,000 × 7.50% ÷ 12 = $25.00
That $25 a month shortens the payoff by 4 mo in the table above, less than the 0.39-point rate gap costs. Check whether your lender charges interest on the average daily balance before counting on it.
Worked example with the calculator
- The line replaces a $200,000 mortgage at 7.50%: interest only is $1,250.00 a month.
- Paying the interest plus $595 a month ($1,845.00 at first) leaves $128,600 when the 10-year draw ends.
- Repayment then runs $1,035.99 plus the same extra, and the line is paid off in 19 yr 1 mo.
- On the minimum schedule (interest only, then 20 years of repayment) the interest would be $336,685; the extra payments save $164,133.
Discipline is the whole planBecause paid-down principal can be drawn again, a first lien HELOC only works if the balance keeps falling. Spending from the line puts the debt, and your first-lien home, back at risk.
Who a first lien HELOC can suit
- Owners with a small remaining balance, steady surplus income and cash reserves who value the ability to re-borrow.
- Households who would otherwise keep large savings idle while paying a higher rate on the mortgage.
- Not a good fit if the payment would strain your budget once interest-only ends; see the jump on the HELOC payment calculator and the interest-only HELOC page.
To compare paying a fixed mortgage faster instead, use the mortgage extra payment calculator. If you already have a line and want out, see can you refinance a HELOC.
Frequently asked questions
What is a first lien HELOC?
A home equity line of credit in first-lien position, usually one that paid off the mortgage. It works like any HELOC, with a variable rate and a draw period, but nothing sits ahead of it on the title.[1]
Is a first lien HELOC better than a mortgage?
Only if its rate is lower or you will pay much more than the minimum. With the same monthly outlay, a line at 7.50% takes longer to repay than a fixed loan at 7.11% in the example above.
Can a first lien HELOC rate go up?
Does depositing my paycheck into the HELOC save interest?
A little: the saving equals the average cash parked times the rate. About $4,000 parked at 7.50% saves $25.00 a month.
Sources
- Comptroller's Handbook: Residential Real Estate Lending (home equity lines and loans)
- Credit Risk Management Guidance for Home Equity Lending (interagency guidance, SR 05-11)
- What You Should Know About Home Equity Lines of Credit (HELOC)
- Regulation Z § 1026.30, Limitation on rates
- Regulation Z § 1026.40, Requirements for home equity plans
- H.15 Selected Interest Rates (bank prime loan rate)
- Primary Mortgage Market Survey (PMMS)