Don’t turn HELOC into first mortgage

Dear Dr. Don,
I would like to replace my mortgage with a home equity line of credit. How would I go about putting the HELOC in the first lien holder’s position if I owe $79,000 on a house that is appraised out at $95,000? Is there a bank that will replace my first with a HELOC?
— Frank First

Dear Frank,
If you take out a home equity line of credit to refinance your first mortgage, the fact that no other loan is senior to the HELOC makes the HELOC the first mortgage on your home.

Home equity loans and home equity lines are commonly referred to as second mortgages because there’s a first mortgage in front of them. That second chair position typically makes the home equity line riskier than a first mortgage. If your HELOC isn’t subordinate to a first mortgage, the HELOC is the first mortgage. You’d want the lender to recognize that it has an improved risk position and, as a result, reduce the rate on your loan.

Even as a first mortgage, I’m not quite sure why you’d want to pursue this type of financing. A HELOC is an adjustable-rate loan, typically priced at a spread to the prime rate. As I write this, the Bankrate national average for a HELOC is 5.71 percent. The Bankrate national average 30-year fixed-rate is 5.52 percent and the average 15-year fixed-rate — a popular option for refinancing — is 4.84 percent. Why take on the interest rate risk of a HELOC when fixed-rate loans are priced competitively to the current HELOC rate?

A HELOC in the early years of the loan is interest-only. If you do pay down the principal balance, you can re-borrow the funds — at least out to some set time in the loan. You didn’t mention either of these provisions as being important in your decision to refinance. Barring that, I don’t see the benefit of refinancing with a HELOC.

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