Yes, absolutely. You could take every additional dollar from your income that isn’t spent each month and put it into your mortgage. The question is whether that’s a realistic strategy, or even better yet, is doing that with a mortgage even close to being a good idea? No, it’s a TERRIBLE idea. The reason no one does that is because every dollar that’s put toward your mortgage loses its liquidity, meaning you no longer have access to it. If you did this with all of your additional money at the end of each month you’d be in an extremely dangerous spot because you wouldn’t have access to the money if you needed it. That’s one of the main differences with a First Lien HELOC. The open-ended nature of a First Lien HELOC allows you to safely leverage as little, as much, or if your maximizing the strategy leverage everything you have to pay down your principal balance.
We know that HELOCs follow different rules than mortgages. HELOCs are open-ended where mortgages are closed-ended and HELOCs calculate their interest using a daily interest calculation where mortgages do so using a monthly interest calculation. We also treat this loan differently; in that we deposit all our income into it and use it to pay our bills with it. I personally don’t worry about rate at all with this because when this works, I know that a higher (or lower) rate doesn’t really change the payoff time or the cost HERE, which means that I’m not afraid about the initial higher rate and I’m not afraid if the rate increases because it still ends up being cheaper than the low-rate mortgages that are available today.
Regardless of whether I’m correct or not about the rate not being important, do you agree that it’s fair to say that because this loan is completely different from a mortgage that it isn’t fair/valid to say that we don’t’ actually know how important rate is here?
The catch is that the fact that you have access to your home’s equity, allowing you to make great decisions with it because it’s so flexible, also gives you the ability to make irresponsible decisions with your home’s equity. For people who would be tempted to buy “that big ticket item” they could never afford before, or for people who would be tempted to overspend each month, this loan would be a very bad option. However, for those people who are disciplined with their budget, it’s can be a game-changer.
Good point!! Usually HELOCs cost very little. That being said, most HELOCs are simply an extension of credit on top of the existing mortgage. A First Lien HELOC is different in that a first position loan pays off another First position Loan, just like a regular refinance. In the same respect, the transaction here includes full underwriting, a full appraisal, title work and recording with the county or state, just like a regular refinance. All in all, the work that needs to be done here is exactly the same as with a full refinance. That being said, you will find that the fees here are much less expensive than a regular refinance.
A sweep account for a First Lien HELOC is one of the most important features to look for when considering this product. It automatically moves or “sweeps” money between your checking account and your HELOC. This feature removes the burden of you transferring money into your HELOC when you get paid, and transferring money back into your checking every time you want to spend money.
When you’re implementing the strategy, with most HELOCs, in order to get your money to your HELOC you direct deposit the money to your checking, and then you have to transfer the money to your HELOC yourself. The second part of the strategy calls for you to pay your bills with your HELOC. This means that for every time you want to spend money you have to transfer funds from your HELOC into your checking account.
HELOC’s generally don’t escrow insurance & taxes by their nature. That’s actually to your benefit!! In this case, you’re not storing your money in someone else’s bank account each month for them to then pay your tax bill & insurance bill for you. Instead, that money is stored in your HELOC, resulting in a lower balance while it’s there, which decreases your interest costs. Then when your Tax bill & Insurance premium come due you just pay for them using your HELOC.
Well, it’s not because it’s unknown and it’s not because it’s a new product:
The main reason really comes down to Interest Revenue. With an amortized loan the bank gets their share of the interest within the first 11 years of you having your loan, with you paying the most in interest the first years (with a 30 year fixed rate mortgage). Banks realize how profitable this structure is to them in a very short period of time. Because they receive so much of the interest revenue during the first years of an amortized mortgage, it creates the incentive for them to only push this type of loan.
The second reason comes down to the fact that this product doesn’t work for everyone. For people who budget really well, live below their means, and consistently make more than they spend, the First Lien HELOC product and strategy will be a great fit! That being said, for people who tend to live month-to-month or have little at the end of the month this product may not align as well given their lifestyle. Banks also know this and so they see it as a risky product if offered and promoted to everyone.