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Is a First Position HELOC a Good Idea to Pay Off Your Mortgage in 2024?

Thinking about using a home equity line of credit (HELOC) to pay off your mortgage? Maybe you’ve heard that a HELOC could help you save money on interest and pay down your mortgage faster. But then you find others online calling it a gimmick to sell more loans. So, who’s right? Is a first-position HELOC really a smart move? More importantly, is it a good idea in today’s economic climate?

What is a First Position HELOC?

Before diving into the payoff strategy, let’s clear up some terminology. A lien is a legal claim to your property. Your mortgage lender holds the first lien on your home, meaning they get first dibs on the proceeds if you default and the home is sold.

HELOCs are usually in the second lien position, only getting paid after the primary mortgage is settled. However, when you use a HELOC to pay off your primary mortgage, the HELOC moves into the first lien position, often becoming the sole lien on the property.

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How Does the First Position HELOC Strategy Work?

Here’s the basic idea:

  • Transfer Your Mortgage Balance: Take out a HELOC and use it to pay off your existing mortgage, effectively transferring the mortgage balance to the HELOC.
  • Monthly Income Deposits: Deposit your entire monthly income into the HELOC, reducing the balance significantly each month.
  • Monthly Expenses from HELOC: Use the HELOC to pay your monthly bills, treating it like a checking account where earnings go in and payments go out.

By depositing your income into the HELOC, you reduce the average monthly balance, and consequently, the interest you pay. While the balance will increase as you pay bills throughout the month, it trends downward overall, helping you pay off the debt faster.

Does the First Position HELOC Strategy Work?

This strategy can be effective, but it hinges on several factors, including current interest rates. Let’s break down some scenarios.

When Interest Rates Are Comparable

Suppose you owe $280,000 on a 30-year fixed-rate mortgage at 6%, with a monthly payment of around $1,800. If you transfer this to a HELOC at 6%, your interest-only payment drops to $1,400. By depositing $8,000 of income and having $3,000 in expenses, you save on interest by lowering the average balance temporarily.

When HELOC Rates Rise

If HELOC rates increase, say to 7.5%, your interest-only payment for the same balance rises to about $1,750. Although you still reduce your balance by depositing income, higher rates slow down your loan payoff.

Rate Increases

HELOCs have variable rates, which means if the Fed raises rates, your HELOC rate and payments could increase. For those who secured low fixed mortgage rates in the past, switching to a high-rate HELOC could be detrimental.

Get Preapproved NowPros and Cons of a First-Position HELOC

Pros:

  • Motivation to Spend Less: Every expense impacts your interest savings, encouraging better spending habits.
  • Low Closing Costs: HELOCs usually have lower upfront costs compared to mortgage refinances.
  • Flexible Payments: Extra income directly reduces your principal, lowering interest.
  • Financial Flexibility: You can access HELOC funds in emergencies, unlike with a traditional mortgage.

Cons:

  • Rate Variability: Monthly rate changes can complicate budgeting.
  • Risk of Overuse: Constantly using the credit line can keep you in debt longer.
  • Equity Requirement: You need enough home equity to qualify for a HELOC that can pay off your mortgage.

Current HELOC Rates and Trends

HELOC rates are tied to the prime rate, which is influenced by the Federal Funds Rate. The Fed has been on a rate-hiking path, and further increases could make a HELOC less attractive. However, if rates start to fall, the strategy could become more beneficial, especially for those with higher fixed mortgage rates.

Using a first-position HELOC to pay off your mortgage can save you money on interest if you’re disciplined and rates are favorable. Always consider your current mortgage rate, future rate trends, and your spending habits before making a decision. If you’re ready to explore this strategy, make sure you understand the risks and benefits in today’s economic environment.

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