Understanding First Lien HELOCs: What Makes Them Different
Most people know about regular HELOCs, which are like a second line of credit behind your mortgage. First lien HELOCs are a whole different story. With a regular HELOC, your original mortgage stays in first place, which means it gets paid first if something goes wrong. The HELOC comes in second. A first lien HELOC takes the place of your current mortgage and becomes the main lien on your home.
In other words, it's a product that combines a mortgage and a line of credit.
According to Bankrate's November 2025 survey, the national average HELOC rate sits at around 7.90%. That's actually come down a bit since the Federal Reserve's rate cuts started in late 2024. Meanwhile, homeowners across America are sitting on massive amounts of equity. The Federal Reserve reported that U.S. homeowners held more than $34 trillion in home equity by the end of 2024, which ranks as the third-highest amount on record.
When I was just in class learning about systems theory (I'm finishing up my Master’s of Social Work (MSW) right now, which feels like it takes forever sometimes), we talked about how financial products exist within larger economic systems. First lien HELOCs emerged as a response to homeowners who wanted equity access without giving up low mortgage rates through cash-out refinancing. Let me simplify this for you.
Say you bought your Louisville home (that's where I'm based, by the way) for $300,000 a few years back with a conventional mortgage at 3.5%. You've paid it down to $250,000, and your home's now worth $400,000. That's $150,000 in equity just sitting there.
The draw period comes first, usually lasting 10 years with most lenders. During this time, you can withdraw money up to your credit limit whenever you need it. According to Navy Federal Credit Union's current offerings, rates can start as low as 7.250% APR for those with excellent credit scores of 750 or higher. You typically make interest-only payments on whatever amount you've actually borrowed, not the full credit limit.
The repayment period kicks in after the draw period ends, typically lasting another 15-20 years. Now you're paying down both principal and interest, and you can no longer withdraw additional funds. Monthly payments usually jump significantly during this phase, so planning ahead is crucial.
One thing that surprised me when we acquired this process knowledge from our previous system – first lien HELOCs typically let you access up to 80-90% of your home's value. Compare that to traditional second-lien HELOCs where lenders usually cap you at 80% combined loan-to-value (CLTV) and you need at least 20% equity to start. Bankrate's research confirms that first lien HELOCs only require 10% equity in your home, making them more accessible for newer homeowners.
This is where first lien HELOCs get interesting, and if you like numbers like I do, it's also kind of exciting. When you pay off a traditional mortgage, most of your early payments go toward interest. Have you ever looked at your mortgage statement and wanted to cry because so little of it goes to the principal? I get how frustrating it is.
First lien HELOCs calculate interest differently using simple daily interest on your outstanding balance. So if you deposit $5,000 from your paycheck into the HELOC checking account, that $5,000 immediately reduces your balance and the interest you're paying.
Let me work through a quick example using round numbers:
| Loan Type | Balance | Rate | Monthly Interest | Principal Paid First Month |
|---|---|---|---|---|
| Traditional Mortgage | $300,000 | 4.5% | ~$1,125 | ~$395 |
| First Lien HELOC (with $8k deposits) | Starts at $300,000, drops to avg $292,000 | 7.5% | ~$1,825 | $1,500+ net reduction |
The textbook answer is that HELOCs charge higher rates, but really, the velocity of paying down principal can make a huge difference. According to industry analysis, disciplined borrowers using velocity banking strategies often pay off their homes 15-20 years faster than traditional mortgages.
But here's the thing – this only works if you're genuinely disciplined. If you've got impulsive spending habits or irregular income, this flexibility could backfire badly. That must have been so stressful for families during the 2008 financial crisis when home values dropped and variable rates skyrocketed.
I keep hearing about velocity banking at industry conferences, and honestly, it's one of those concepts that sounds too good to be true until you see the math. Here's what customers never tell you – most people don't naturally understand how money velocity affects debt payoff. We're trained to think "lower interest rate always wins," but that's not necessarily true when you factor in payment structure and cash flow timing.
Step 1: Direct deposit your entire paycheck into your HELOC account. If you earn $8,000 monthly, that $8,000 immediately reduces your HELOC balance and the interest you're charged.
Step 2: Pay your monthly expenses throughout the month from the HELOC. As you spend $6,500 on mortgage, groceries, utilities, etc., your balance increases back up.
Step 3: Net result: You've paid down $1,500 ($8,000 income minus $6,500 expenses) from your principal balance that month.
According to BECU, their HELOCs offer introductory rates as low as 5.99% APR for the first six months, then range from 7.24% to 10.09% variable APR depending on creditworthiness. Even with these variable rates, the velocity strategy can work powerfully.
Let's figure this out together with real numbers. Assume you have:
$300,000 first lien HELOC at 7.5% interest
$8,000 monthly gross income
$6,500 monthly expenses
Fixed payment: $2,098 monthly
Years to payoff: 30
Total interest paid: $454,280
Extra principal monthly: $1,500
Average time to payoff: 7-9 years
Total interest paid: approximately $95,000
The savings? Nearly $360,000 in interest and 20+ years of payments. But (and this is a big but) you need consistent positive cash flow and the discipline not to overspend just because credit is available.
This plan works really well for some kinds of borrowers. People who make a lot of money, have steady paychecks, and don't spend a lot of money compared to their income get the most out of this. If you make $150,000 a year but only spend $80,000, you have a lot of extra money to put toward the principal.
Families that are good with money and already live well below their means won't be tempted to spend too much just because they have access to hundreds of thousands of dollars in credit.
People who already have emergency funds set up so they don't have to rely on the HELOC as their only safety net. You still need to have enough money saved up to cover your bills for three to six months.
People who own homes and plan to stay there for at least 5–7 years will benefit from the faster payoff. If you plan to move soon, the strategy won't work as well.
Let me level with you. I've seen velocity banking work brilliantly for some families and absolutely implode for others. The risks are real. One client (sweetest lady, reminds me of my grandma) got a first lien HELOC and within six months had spent an extra $40,000 on "small things that added up." Now she's struggling to pay it down.
Your rate isn't fixed. When the Federal Reserve raises rates, your payment increases. According to Bankrate's Federal Reserve analysis, the Fed cut rates by a quarter point in October 2025 for the second time this year (they also cut rates in December 2025 again), but the future direction remains uncertain. If rates spike like they did in the early 1980s, your payment could become unmanageable.
If your home value drops significantly, you could end up owing more than your house is worth (underwater). During the 2008 crisis, some homeowners with first lien HELOCs had to deal with terrible situations when property values dropped by 30% to 50% in some markets.
Some first lien HELOCs require you to make a balloon payment of the full remaining balance at the end of your draw period. This could make you have to sell unless you've been making big payments on the principal or can refinance.
Through my project management work, I see homeowners use first lien HELOCs for various purposes. Some make great financial sense; others not so much. Here's my honest take.
Using HELOC funds for renovations that genuinely increase your home's value can be smart. Think kitchen remodels, bathroom updates, or finishing basements. According to the National Association of REALTORS®s' 2025 Profile, Home equity is now the main way for Americans to build wealth. For example, waiting to buy a home from age 30 to 40 could cost you about $150,000 in potential equity gains on a typical starter home.
The bonus? According to the IRS, you can deduct the interest on first lien HELOCs used to make improvements to your home if you have a total of $750,000 or less in mortgage and HELOC debt. If you make $50,000 worth of real home improvements, the interest you pay could lower your tax bill.
We talked in class about how high-interest debt can keep families in poverty. I was just learning about financial systems. If you have $30,000 in credit card debt with a 22% APR, putting it all together into a first lien HELOC with a 7.90% APR could save you thousands of dollars in interest each year.
But this is the most important part: you're turning unsecured debt (like credit cards) into secured debt (like your home). If you can't pay, you're not only hurting your credit score, you're also putting your home at risk of foreclosure. Only combine your debts if you've changed the way you spend money that got you into debt in the first place.
Some people think it's wrong to use home equity to pay for college, but it can make sense mathematically. Most private student loans have interest rates between 8% and 14%. The rate on your first lien HELOC could be between 7% and 8%. You could be saving 1% to 6% on interest each year.
The bad news? You're putting your home at risk to pay for school. You are still responsible for the full debt if your child drops out of school or can't find a job after graduation. There are forgiveness programs and income-driven repayment plans for student loans, at least. Those protections aren't available with first lien HELOCs.
Some savvy investors use first lien HELOCs to buy rental properties or fix-and-flip projects. The flexibility is appealing – you can access funds quickly when you find a deal, then pay down the balance as rental income comes in or when you sell the property.
According to HUD's Q1 2025 housing market summary, household growth has slowed but property investment remains active. Just remember, you're leveraging your primary residence to invest in additional real estate. If both the housing market and rental market decline simultaneously, you could face serious trouble.
Some financial advisors say that you should keep a small emergency fund (maybe enough to cover one or two months' worth of expenses) and use a first lien HELOC as backup for bigger emergencies. The reason? Instead of sitting in a savings account earning 0.5%, you could invest your emergency fund money and make money.
Families who used this strategy in 2008–2009 must have been very stressed out when lenders froze or lowered HELOC limits because home values fell. Many clients told me that their banks cut their available credit in half overnight, just when they needed it the most. I understand how frustrating it is.
If you want to use this plan, you should keep at least three months' worth of expenses in cash savings and only use the HELOC for real emergencies that go beyond that.
Some business owners use first lien HELOCs to pay for their businesses. The rates are usually better than those on business loans or credit cards, and you don't have to give up any ownership of your company.
The risk level is very high, though. Most small businesses go out of business within the first five years. If things don't go well, you could lose both your business and your home if you use your home as startup capital. Only think about this option if you have other ways to make money and can't get business financing any other way.
Costs of health care keep going up a lot. Even with insurance, major medical procedures can easily cost between $50,000 and $100,000. If you have to pay for medical bills you didn't expect, a first lien HELOC gives you access to money at much lower rates than medical credit cards (often 20% or more).
But look into other choices first. Many hospitals have payment plans, programs to help with money, or can work with you to lower your bills by a lot. Only use your home equity for medical bills after you've tried everything else.
The lending landscape has tightened since 2020. Here's what lenders typically require for first lien HELOC approval.
680-699: May qualify but expect higher rates (9-11%)
700-719: Standard approval with moderate rates (7.5-9%)
720-740: Better rates (7-7.5%)
740+: Best available rates (current low end around 7.25%)
Dutch Point Credit Union currently offers rates based on prime minus 0.25% (currently 7.25% prime as of September 2025), with fixed introductory rates for the first 12 billing cycles.
Income Documentation has become more stringent.
Two years of W-2s or tax returns
Recent paystubs (last 30-60 days)
Proof of any additional income sources
Employment verification
For self-employed: two years of personal and business tax returns, profit/loss statements, bank statements
Debt-to-Income Ratio is scrutinized heavily. Most lenders cap DTI at 43%, but the best rates typically require 36% or lower.
Home equity requirements are surprisingly flexible with first lien HELOCs. While traditional second-lien HELOCs require 20% equity, first lien products often work with just 10% equity. Some lenders even allow you to access up to 90% of your home's value.
Reserve Requirements vary by lender. Expect to show 2-6 months of PITI (principal, interest, taxes, insurance) payments in liquid reserves. If your monthly PITI is $2,500, you'd need $5,000-$15,000 in accessible savings or investments.
Property Appraisal is mandatory. Lenders need current market value confirmation. In 2025, most appraisals costed $400-$600 and took1-2 weeks to complete. According to Bankrate's home equity research, home equity levels saw a slight decline in Q1 2025 with mortgage-holding homeowners losing an average of $4,200 in equity compared to Q1 2024. This makes accurate current appraisals even more critical.
Since HELOC rates are variable and typically tied to the prime rate, Federal Reserve decisions directly affect your monthly payment.
The Fed sets the federal funds rate, which is the interest rate banks charge each other for overnight loans. The prime rate (what banks charge their best customers) typically sits 3 percentage points above the fed funds rate.
At the Federal Reserve's October 2025 meeting, they cut interest rates by a quarter point for the second time in 2025, and again at the December 2025 meeting, but Fed Chair Jerome Powell indicated uncertainty about future direction. When the Fed cuts rates, HELOC rates typically fall within 30-60 days as lenders adjust their pricing.
Here's what this means practically:
Prime rate likely drops from 7.25% to 7.00%
Your HELOC rate (prime + margin of 0.50%) drops from 7.75% to 7.50%
On a $300,000 balance, your monthly interest drops from $1,937.50 to $1,875.00
Annual savings: approximately $750
Prime rate likely increases from 7.25% to 7.50%
Your HELOC rate increases from 7.75% to 8.00%
On a $300,000 balance, monthly interest rises from $1,937.50 to $2,000
Annual cost increase: approximately $750
The Fed's decisions are influenced by inflation, employment data, economic growth, and financial stability concerns. In 2025, inflation concerns persisted while the labor market showed mixed signals. Nobody can predict with certainty where rates will be in six months or two years, which is why variable-rate products require financial flexibility.
CBS News financial analysis from March 2025 suggested home equity levels would continue rising modestly, with expert predictions of around 5% home price appreciation rather than the 8-10% seen in previous years.
Let me break down how first lien HELOCs stack up against other borrowing options you might be considering.
Replaces existing mortgage
Higher credit limits (up to 90% LTV)
Slightly lower rates due to first lien position
Requires only 10% equity
Complex to refinance later
More financial flexibility with velocity banking
Sits behind existing mortgage
Lower credit limits (typically 80% CLTV)
Slightly higher rates
Requires 20% equity minimum
Easier to refinance primary mortgage later
Simpler product structure
According to Yahoo Finance's November 2025 HELOC rate analysis, with mortgage rates lingering near 6%, homeowners with low primary mortgage rates (4% or below) are understandably reluctant to refinance.
Keep original mortgage rate structure
Variable interest on drawn amount only
Flexible access to funds
Lower closing costs
Interest-only payments during draw period
New fixed mortgage rate on entire loan
Lump sum cash at closing
Higher closing costs ($3,000-$6,000)
Standard principal and interest payments
Revolving credit line
Variable interest rate
Interest only on borrowed amount
Draw period then repayment period
Current rates around 7.90% average
Fixed lump sum
Fixed interest rate
Immediate principal and interest payments
Set repayment term (5-30 years)
Current rates around 8.02% average per Bankrate
Once you've got your first lien HELOC, smart management is absolutely critical. I've seen too many homeowners stumble here. Let me figure this out together with you.
Most first lien HELOC lenders provide an integrated checking account with automatic sweep features.
Here's how to structure it:
Primary HELOC Account: This is where your paycheck deposits, holds your available credit balance, and charges interest on outstanding balance daily. Most lenders provide a debit card, checks, and online bill pay.
Budget/Expense Account: Consider keeping a separate regular checking account for daily spending to help track expenses against budget. Transfer your budgeted spending amount monthly from HELOC to this account.
Emergency Reserve: Maintain 3-6 months expenses in a separate high-yield savings account (not part of your HELOC). This protects you if your lender freezes or reduces your credit line unexpectedly.
The single biggest mistake I see? Treating the HELOC like a regular checking account without monitoring the balance. Remember, interest accrues daily on your average daily balance.
Let's work through a simplified month:
Starting Balance: $280,000
Day 1: Deposit $8,000 paycheck → $272,000 balance
Days 2-15: Spend $3,000 on expenses → $275,000 balance
Day 16: Deposit $8,000 paycheck → $267,000 balance
Days 17-30: Spend $3,500 on expenses → $270,500 balance
Average Daily Balance: Approximately $273,500
Monthly Interest: $273,500 × 7.75% ÷ 12 = $1,765
Higher Average Balance: $278,000
Monthly Interest: $278,000 × 7.75% ÷ 12 = $1,793
Extra Interest Cost: $28 monthly or $336 annually
That's why velocity banking focuses on depositing income immediately and timing expense payments strategically. Every dollar that sits in your HELOC reduces interest cost.
During the draw period, you're typically only required to make interest-only payments. But here's where strategy matters:
Minimum Payment Only: Paying just interest means your balance stays flat. You're not building equity or making progress on payoff.
Interest Plus Fixed Amount: Adding $500-$1,000 monthly to principal creates steady progress without overextending your budget.
Variable Surplus Method: Put all extra cash flow toward principal one month, less the next month when unexpected expenses arise. Requires careful tracking but maximizes flexibility.
Aggressive Paydown: Direct all available funds toward principal, minimizing time in debt and total interest paid. Only works if you have strong cash flow and excellent financial discipline.
According to Unison's 2024 Home Equity Report, homeowners face increasing challenges accessing equity, with options typically limited to cash-out refinancing, home equity loans, or HELOCs - all of which create debt obligations.
If you see any of the following warning signs, you may be mismanaging your first lien HELOC:
Steadily Increasing Balance: If your balance goes up every month, it means you're spending more than you're making. If you follow this path, you could max out your credit limit and lose your home.
Missing Minimum Payments: After 30 days, your lender will tell credit bureaus about late payments, which will hurt your credit score. If you miss a few payments, you could default and lose your home.
Using HELOC for Regular Living Expenses: If you're using HELOC money to pay for groceries and other regular expenses because your paycheck isn't enough, you need to find other ways to make more money.
Rate Shock Paralysis: If the Federal Reserve raises rates and your payment becomes too high to afford, you might freeze instead of doing something about it. This is a sign that you're in trouble. Call your lender right away to talk about your options.
Not Paying Attention to the Balloon Payment: If your HELOC has a balloon payment at the end of the draw period and you haven't planned for it, you could be in big trouble. At least 18 to 24 months before the balloon date, you should start making plans for how to pay off or refinance your loan.
After helping dozens of families make decisions about first lien HELOCs (and honestly, I've lost count of how many late-night calls I've gotten about rate worries), I've learned that the key to success is matching the product to the borrower's financial personality and situation.
First lien HELOCs are great ways to get to your home equity in a flexible way. You might even be able to pay off your home faster by using velocity banking strategies. The financial opportunity is big because rates are expected to be around 7.90% in early 2026 and American homeowners have never had more equity.
But this product requires a lot more money management than a regular mortgage. Your payment could go up because of variable rates, and large credit limits make it easy to spend too much. The debt is secured by your whole home. First lien HELOCs can save tens of thousands of dollars in interest while building equity faster for families that are naturally frugal, have stable high incomes, and are good at managing their money.
For most people—probably 70–80% of borrowers—traditional second-lien HELOCs, home equity loans, or even not using equity at all might be better options. It's okay to admit that a product doesn't work for you. The goal is to make sure you can buy a home, not to take unnecessary risks with complicated financial products.
If you're thinking about getting a first lien HELOC, the first thing you should do is honestly look at your long-term plans for the property, your financial discipline, your income stability, your spending habits, and your risk tolerance. If you're not sure, talk to a fee-only financial planner who can look at your situation objectively.
For flexible home equity access with competitive rates and streamlined digital application processes, explore AmeriSave's home equity solutions to find the option that fits your specific financial goals.
Most lenders will only approve a first lien HELOC if your credit score is at least 680. However, at this level, you will have to pay higher interest rates, usually between 9% and 11%, depending on things like your debt-to-income ratio and loan-to-value ratio. Most of the time, you need a credit score of 740 or higher to get the best rates, which are usually between 7.25% and 7.75%. If your score is between 700 and 739, you'll get moderate rates in the 7.5 to 9% range. These rates are still reasonable, but they're not the best prices you can get. Some portfolio lenders only work with borrowers who have credit scores as low as 640. However, at that level, you should expect much higher rates and stricter rules about income verification, cash reserves, and loan-to-value ratios. Lenders look at more than just your credit score. They also look for patterns in your credit history, such as recent late payments, high credit utilization across your credit cards, recent collections or judgments, and any bankruptcies or foreclosures that have happened in the past seven years. If you have a clean credit report with no recent problems, you will always get better terms than someone with the same score but recent negative marks on their report.
Yes, that's exactly what a first lien HELOC does. It completely replaces your current mortgage and becomes the main lien on your property, unlike a traditional second-position HELOC, which sits behind it. This is how it works: your new lender pays off your current mortgage at closing using the HELOC funds. This makes the first lien HELOC the only loan secured by your property. Then, they give you access to any remaining equity as a revolving credit line that you can use as needed. If your home is worth $400,000 and you owe $250,000 on your current mortgage, and you qualify for a first lien HELOC of $320,000 (80% of your home's value), the lender would pay off your mortgage at closing and give you access to the remaining $70,000 as a credit line that you can use for anything you want. If you have a higher-rate mortgage and want to pay off your home faster using velocity banking methods while still being able to access your equity for emergencies or planned expenses, this strategy makes a lot of sense. Just know that you're changing fixed-rate debt into variable-rate debt, which is risky if interest rates go up a lot over time.
You need to know about some worrying things that could happen if the value of your home drops a lot after you get your first lien HELOC. First, your lender might lower your credit limit through a process called credit line reduction. They can do this if your loan-to-value ratio is higher than their maximum threshold, which is usually 80–90% depending on the lender's policies. If your home was originally appraised at $400,000 and you had a $320,000 HELOC limit, but the value drops to $320,000 based on declining market conditions in your area, your lender might reduce your limit to $256,000 (representing 80% of the new lower value), potentially leaving you with no available credit or even requiring you to pay down the balance to meet the new limit. Second, if you go underwater, which means you owe more on the HELOC than the home is worth, it would be very hard to refinance or sell the property because you couldn't pay off the whole HELOC with the money you made from the sale. During the 2008-2010 financial crisis, this trapped thousands of homeowners who couldn't move for job opportunities or life changes because they were stuck with negative equity situations. Third, if you defaulted on a loan where you owe more than the house is worth, you would still lose your home and owe money to the lender in many states.
To figure out velocity banking, you need to look at your current mortgage amortization schedule and your projected HELOC payoff using your real monthly cash flow numbers instead of made-up ones. First, figure out how much money you make and how much you spend each month, not including your current mortgage payment because the HELOC will take its place. The difference between these two numbers is the extra money you have each month to pay down the HELOC principal. If you make $10,000 a month and spend $7,000 on all your living costs, you have $3,000 left over each month. If you have a $300,000 first lien HELOC with a 7.75% interest rate, your first month's payment would be about $1,937. If you pay that interest and the full $3,000 extra toward the principal, you'll lower your balance by $3,000 in the first month. If your income and expenses stay about the same, you should be able to pay off the whole $300,000 in about 8 to 9 years, taking into account the fact that the interest charges will go down as your balance goes down. Think about your current mortgage: if you have a $300,000 mortgage at 4.5% for 30 years, your monthly payment is $1,520. In the first few years, only about $395 of that goes toward the principal, and the rest goes toward interest. It would take you the full 30 years to pay off the loan, and you would pay about $247,220 in interest during that time. With the velocity banking method despite the seemingly higher 7.75% interest rate, you'd pay roughly $95,000 in total interest over just 8-9 years.
Sadly, you don't have many options if your lender decides to freeze or lower your first lien HELOC credit line. This is something that many homeowners learned the hard way during the financial crisis of 2008–2009. Lenders usually have the right to lower or stop your credit limits if certain things happen. For example, if your home's value drops significantly below the original appraised value, if you miss payments or show other signs of financial trouble like maxed-out credit cards or new delinquencies, if the property's condition gets much worse based on a drive-by appraisal or inspection, or if the economy as a whole makes lenders worried about lending risk in your area. Federal rules protect you by requiring lenders to tell you in writing before making any changes to your credit line, explain why they are lowering or stopping it, give you a chance to dispute the valuation or other factors if you think they are wrong or out of date, and keep certain consumer protection standards in place during the process to avoid discrimination or unfair practices. But if the lender can show that they have real concerns about your creditworthiness based on credit report data or loan-to-value ratios based on recent comparable sales, they have a lot of power to change your credit line to protect their own interests.
The same rules that apply to mortgage interest deductions also apply to first lien HELOC interest deductions. You should know, though, that you can only deduct the interest if you used the money you borrowed to buy, build, or make major improvements to the home that secures the loan. No matter how smart it seems, you can't use the money for anything else. If you and your spouse file jointly, you can deduct the interest on up to $750,000 in mortgage and HELOC debt. If you're married and filing separately, you can only deduct the interest on up to $375,000. You can't just take the standard deduction; you have to write down your deductions on Schedule A. This means that your total itemized deductions, which include mortgage interest, property taxes up to $10,000, charitable contributions, medical expenses over a certain amount, and state income taxes, must be more than the 2025 standard deduction of $29,200 for married couples filing jointly or $14,600 for single filers. The only thing that affects the tax benefit you get is your marginal tax bracket. If you pay $5,000 in deductible HELOC interest every year and are in the 24% federal tax bracket, you could save about $1,200 on your federal taxes by multiplying $5,000 by 24%.
Many lenders now offer fixed-rate conversion options within first lien HELOCs, but the terms can be very different from one lender to the next, so you should make sure you know exactly how they work before using them as part of your plan. These fixed-rate advance options usually let you lock in fixed rates on certain parts of your HELOC balance. The minimum amounts for each conversion are usually $5,000 or $10,000, depending on the lender's rules. You choose an amount of your balance that you want to change from variable to fixed, pick a fixed-rate term from options that usually include 5, 10, 15, or 20 years, and then accept the fixed rate that your lender offers you at that time, which is usually a little higher than the current variable rate. After that, you start making separate principal and interest payments on that fixed portion while the rest of your balance stays at the variable rate. If you have a $200,000 first lien HELOC balance with a variable rate of 7.75%, you might want to change $100,000 of that to a fixed rate of 8.25% for 15 years. You would then make fixed monthly payments on the $100,000 part, while the other $100,000 would stay at whatever the variable rate is at the time.
Your first lien HELOC will enter the repayment period after 10 to 15 years, depending on the terms of your loan. A lot of important things happen at this time that can have a big impact on your monthly budget if you're not ready. First and most obviously, you can't get any more money from the credit line. You lose the flexibility you may have been relying on when the draw period ends and the revolving credit feature ends. Second, and usually more important for your money, the way you pay changes a lot. Now, instead of just paying interest or interest plus whatever principal you choose to pay, you have fully amortizing principal and interest payments that are meant to pay off the entire remaining balance over the repayment period. At this point, your monthly payment could easily double or even triple, depending on how much you still owe. If you had kept a balance of $200,000 during the draw period and made monthly interest-only payments of about $1,290, your repayment period payment could go up to between $2,800 and $3,200 per month, depending on how long the term is and what the interest rate is at the time.
Investing in the stock market with home equity is very risky and not a good idea for most homeowners. I say this as someone who generally believes in investing for long-term wealth building. This is the main issue: you're borrowing money against your home, which means you could lose it if things go wrong, to buy assets that could lose 30% to 50% or more in a major market crash. This creates a terrible mismatch between your guaranteed debt payments and your uncertain investment returns. People who don't fully understand the risks might think the math looks good on paper. For example, if you borrow at 7.75% and the stock market historically averages 10% annual returns, you might think you're "making" 2.25% on the spread. But this simple analysis leaves out a lot of important information, such as the fact that investment returns aren't guaranteed or stable over any given time period (the S&P 500 has had multiple years with 20%+ declines, including several in recent memory), you have to make HELOC interest payments every month no matter what, a big market crash could wipe out a huge part of your investment while you still owe the full HELOC balance, and the stress of owing hundreds of thousands of dollars on your home while watching your investments decline can be absolutely devastating.
Most lenders will give you access to your credit line within 3–5 business days after your first lien HELOC officially closes and you sign all the final documents. However, the exact timing will depend on a number of factors that you should know about and plan for. Most home equity products that are secured by your primary residence have a three-day right of rescission period, which is required by federal law. This means that you can cancel the deal for any reason within three full business days after the closing date. Your lender is not allowed to give you money or let you use your credit line until this mandatory rescission period is over. If you don't cancel within three days, lenders usually activate your account and give you different ways to get to your money. These include online banking login information so you can transfer money electronically, a checkbook so you can write checks directly from the HELOC account, a debit card for shopping or withdrawing cash from ATMs, and the ability to wire transfer larger amounts of money. Depending on how you choose to do it, the first time you try to get money may take an extra 1–2 business days as the transaction goes through the banking system.
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