You own your home free and clear but find yourself in a financial bind. You need money, but it’s all tied up in your home. Can you get a first deed HELOC?
The short answer is ‘yes.’ The long answer is that it depends on your circumstances. Just like a HELOC in second position, you must qualify for the loan. We’ll discuss how to go about that below.
The Appraised Value’s Importance
The largest factor is your appraised value. Second is how much money you need. Since you don’t have any outstanding liens, you are in good shape. However, you need that appraised value first.
Let’s say your home’s value is $200,000. You can’t take out a HELOC for that full amount. Instead, a lender will maximize your HELOC at a specific percentage. Most lenders allow up to 80%. This means you could borrow up to $160,000.
Qualifying for the HELOC
Once you know there is enough value in your home, you must qualify for the loan. The bank will look at your income, assets, and liabilities. They will also pull your credit.
There is not a one-size-fits all guidelines for the first deed HELOC. Each lender has their own requirements. This isn’t a loan lenders will sell on the secondary market. They keep it on their books, so they call the shots.
Generally, you want a credit score of at least 660, if not higher. You also want your debts as low as possible. Your new debt ratio will include the proposed mortgage payment plus any existing liabilities.
The lender will determine your front-end debt ratio by determining the ‘worst-case’ scenario for your payment. HELOCs do not require payment unless you withdraw the funds. You can get the loan and let the entire $160,000 sit there untouched, and you would not owe a dime. The second you take money out of the account, though, it starts accruing interest.
Most lenders will determine your DTI based on the fully amortized principal and interest payment as if you withdrew the entire amount. This way they know that you can afford the full payment when the loan is out of the draw period. This doesn’t happen for 10 years, but the bank can cover its bases this way.
The Benefits of the First Deed HELOC
You might wonder why you would want a HELOC versus a standard loan. A home equity loan would do the same thing, right? It would, but in a different way. The home equity loan gives you the full amount of your money in one lump sum. You don’t draw on the money – you get it once and that’s it. Once you use the money, it’s gone.
You also have to start making principal and interest payments on the full amount right away. You don’t get a draw and repayment period. Your payments start as principal and interest from day one. The term is usually for 20 years, but the rate can be adjustable.
A first deed HELOC, on the other hand, only costs you interest if you withdraw the money. Some borrowers take the money out but don’t touch it. They leave it for an emergency fund. If they never touch it, they never owe interest.
The HELOC also gives you the chance to reuse the funds if you pay the back. Let’s say you use $5,000 of your funds. Technically, you only owe interest on that amount during the draw period. This is usually the first 10 years. However, if you pay it back with both principal and interest, you can reuse the principal until the draw period’s expiration.
If you want to tap into your home’s equity, taking out a first deed HELOC can be a smart move. HELOCs usually have lower interest rates and closing fees. Just watch out for any annual fees or service charges on the account. Either way, you can get your home’s equity, giving you a little more financial flexibility when you own your home free and clear.