First Lien HELOC or Cash Out Refinance?

Updated September 15, 2021 |

Food for Thought

Everyone has an interest in paying low-interest rates on their mortgage. Some learn how to leverage their equity to save on payments. But a few know that a 1st Lien HELOC can replace their mortgage and give them access to their equity.

Did you know a 1st Lien HELOC can maximize cash flow and pay off your home in 5-8 years?

The value of a 1st Lien HELOC is high. But some need to understand how it differs from a standard cash-out refinance. This article will go over the differences to help you decide which is best for you.

HELOC Defined

If you already have a first mortgage, you can get a Home Equity Line of Credit (HELOC). This is like another loan and will have its own term and repayment schedule. If you own your house outright and you have no mortgage, you may be able to open a home equity line of credit.

This means the HELOC will be your first mortgage.

A HELOC is a loan that uses a borrower’s home equity as collateral. Home equity is also known as the difference between what your property market value is and what you owe on it.

A HELOC has a variable interest rate. The interest rate changes with the index, usually the U.S. Prime Rate as published in The Wall Street Journal. Some lenders also offer fixed-rate loans. These could be a good option if you want to convert your variable-rate loan into a fixed-rate loan.

A 1st Lien HELOC is a combination of a traditional mortgage and a Home Equity loan. The amount of money that you borrow is the full amount that you owe. You can pay it off for as long as you want, but you must pay the full amount of interest due each month.

To receive a 1st Lien HELOC, you must first have an existing first mortgage or first-lien. The 1st Lien HELOC is the first loan against your property and it comes after all first mortgages. There are no closing costs.

You can borrow up to a certain percentage of your home equity, which is usually around 80%. So if you owe $200,000 on your home and it’s worth $300,000, then you have $100,000 in home equity. With 1st Lien HELOCs, you can borrow up to 80% of your $100,000 or $80,000 in this case.

Benefits of HELOC

A 1st Lien HELOC offers several benefits. You can circulate your money at will. Your interest calculation comes from the average balance of what you owe every day.

Since you are able to get at your funds as needed, you only have to pay the interest each month. The HELOC acts as a line of credit. You can pay money in or draw money out as your needs dictate.

These items matter because they provide tremendous flexibility and value to the homeowner. A traditional mortgage is a rigid obligation. While a HELOC allows homeowners to:

  • Access capital
  • Consolidate debt
  • Pay down the principal balance


The first-lien HELOC is a good first option for those who want to use their home equity as collateral. First-lien HELOCs have lower interest rates than first-lien cash-out refinancing. 1st Lien HELOCs have first priority over first-lien cash-out refinancing.

This is because first-lien HELOCs are first mortgages and cash-out refinances are second.

Cash-Out Refinance Defined

A cash-out refinance pays off your first mortgage. This gives you a new type of loan. The interest rate and pay-off period may change.

You will get a new payment amortization schedule when you refinance your mortgage. This tells you how much you need to pay for the monthly mortgage payments to pay off your loans.

A first-lien cash-out refinance is when you receive money from the first lien holder. It’s called first-lien because it takes priority over other debts. The amount of your home equity determines the amount you receive.

When you get a cash-out refinance, you pay off your old mortgage and any other costs. You can then use the rest of it for whatever you want. A cash-out refinance can be a fixed-rate mortgage or an adjustable-rate mortgage.

Closing costs are like your original mortgage.

Benefits of Cash-Out Refinancing

First-lien cash-out refinances are usually lower interest rates than first-lien HELOCs. This means that first-lien cash-out refinance borrowers can borrow more money.

A first loan is always the first in line. Many use it to pay off any debts that have a higher interest rate like credit card bills or other loans. Some people use their home equity to consolidate first and second mortgages.

The first-lien cash-out refinance has a fixed rate. This is unlike HELOCs which are variable rates. Also, there are no fees with first-lien cash-out refinances.

The final benefit is that first-lien cash-out refinances increase your credit score. First-lien cash-out refinances usually appear on your credit report as a tradeline.

Interest Calculation

The calculation for HELOC’s interest rate is different than traditional mortgages. Knowing this difference can save you a lot of money by paying down your principal faster.

Traditional mortgages use the amortized interest calculation. This means that they use what you owe last month to calculate your next month’s interest payments. This forces you to pay the highest amount of interest.

HELOCs use the average daily balance to calculate interest payments. Daily calculations of your interest payment include that day’s amount of money. By decreasing your balance each day, you decrease how much you pay over time.

Taking Advantage of HELOC

Many people use a HELOC to pull some equity out of their home to cover a new or second home’s down payment. Others use it to pay down principal interest at a faster rate. Then there are those who use it to consolidate their higher interest rate debts.

Some even use their equity to invest in real estate.

In all cases, individuals use their equity to advance their future. Contact us if you’d like clarity on the difference between a 1st Lien HELOC and cash-out refinance. We’ll be happy to help you discover which financial vehicle is best for your situation.

Achieve Financial Freedom

Sign up on to get connected with a licensed lender who can deliver an all-in-one 1st Lien HELOC. They’ll walk you through the application process and help outline your budget, your numbers, and exactly how much you can save by replacing your mortgage.