You likely heard of a method where you could replace your mortgage with a 1st lien position HELOC (Home Equity Line of Credit). But does this make sense? When does it make sense? And how exactly does it save money and time?

Now, if you’re referring to the company, Replace Your Mortgage (Replace Your University), I have a separate article for Replace Your Mortgage vs. Accelerated Strategies.

So here in this article, I will explain what it means to replace your mortgage with a HELOC, how it works, and give you a step-by-step breakdown of the method.

I walk through how a 1st lien HELOC works, and what to watch out for, in my video:

What is a first lien HELOC?

A first lien HELOC is a home equity line of credit that sits in first position on your home, the spot your mortgage normally holds. Instead of a mortgage plus a separate HELOC, you have one revolving line of credit. You can pay it down, draw from it again, and the bank charges interest on your daily balance.

"First lien" just means that lender gets paid first if the home is sold or foreclosed on. A regular HELOC that you add on top of an existing mortgage is a second lien.

Some lenders call their version an All In One loan or an offset mortgage.

What it means to “replace your mortgage” is simply refinancing your mortgage into a HELOC whereas the HELOC pays off your current mortgage. You’re not creating new debt. You’re simply swapping one type of loan with another. The difference is access to equity and how the interest is calculated on a HELOC that makes the savings possible.

First lien HELOC vs mortgage: what changes?

Traditional mortgageFirst lien HELOCRateOften fixedUsually variable (some offer fixed-rate options)How interest is chargedMonthly, on an amortization scheduleOn your average daily balanceAccess to equityNone without a new loan or cash-out refinanceDraw from the line during the draw periodWhere your paycheck goesChecking accountOften straight into the line, which lowers the balanceGetting oneYou may already have itRequires replacing your current mortgage

That last row matters. A first lien HELOC isn't something you add. You pay off your current mortgage with it, which means giving up your existing rate.

Who Qualifies?

Generally, qualifying for a 1st lien HELOC can be more stringent than a traditional mortgage. Most lenders will require:

At least 680 FICO score,
Less than 43% Debt-To-Income Ratio, and
2 years of Tax Returns
At least 3 months of reserves. (Liquidable assets equal to 3 months of payments)

These are the minimal requirements and there may be certain limitations and exceptions to the approval process.

Just like any other mortgage lending, you’ll be expected to fill out a loan application, undergo a credit check, and get your property appraised for establishing the home value.

While approval and closing times may vary, it can as quick as 30 days or some times, up to 60 days depending on the complexity of your financial situation.

How Does Replacing Your Mortgage with a HELOC Save You Money & Time?

Replacing your mortgage by itself does not save you money, though it can if the HELOC rate is lower than your mortgage rate. The saving comes from what you do to the average daily balance. Remember, a HELOC Is a revolving line of credit. Unlike a mortgage that uses monthly interest calculations, a HELOC will use daily interest calculations. It’s this difference that could create the additional savings.

So here’s how the borrower would lower the average daily balance on the HELOC. The borrower would apply their entire paycheck into the HELOC principal balance each pay period. This would aggressively lower the balance on the HELOC. But because the HELOC allows the borrower to take a draw at any time, they would do so for life expenses.

What I would recommend is using a credit card as a “float”. As long as the borrower makes a full payment on the credit card statement balance, they would not owe any interest on the credit card. What this means is that the borrower could expect 20-30 days of an interest-free period on standard credit card purchases. This allows the HELOC balance to remain lower. On the other hand, if the borrower makes frequent draws from the HELOC to pay for expenses directly, this only increases the line of credit balance which means higher interest cost.

By keeping the line of credit balance low throughout the month, the borrower could expect to pay substantially less interest cost. With less of an interest cost, more of the borrower’s payment could be applied to principal which further creates the savings.

Some people refer to this concept as “paycheck parking”. Instead of leaving your hard-earned cash inside of a checking account, earning virtually zero interest, you could save interest by “parking” your paycheck inside of the HELOC to further reduce the balance. But, the HELOC still allows you to draw funds out for expenses and other needs.

This is the core mechanism as to how you could replace your mortgage with a HELOC and achieve savings.

Why does a 2nd Lien HELOC usually win on the math?

I've been teaching this concept for almost a decade, and I've run thousands of scenarios. A second-lien HELOC is almost always the winner on time and interest savings, but it does take a little more maintenance.

With a first lien HELOC, your entire home balance sits on the line of credit. If you owe $300,000, that whole amount accrues interest at the HELOC rate for as long as it takes to pay down.

With a second-lien HELOC, you keep your mortgage and use a smaller line, maybe $10,000 to $20,000, to make chunk payments against principal. You pay that smaller balance down quickly with your cash flow, then repeat. A smaller balance that turns over often tends to cost less interest than a large balance that lingers.

There's also the rate question. If your mortgage is locked at a low fixed rate, swapping it for a higher variable rate on the full balance can cost you more, not less. If your mortgage rate is that low, you might be better off just making extra payments. I explain that tradeoff in should I make extra mortgage payments.

My answer can change depending on your situation, and that's the whole point of running your own numbers.

Why does the 1st Lien HELOC win on Convenience and Access?

Though the 2nd lien HELOC wins on the mathematical advantage, the 1st lien HELOC is a clear winner from convenience and access standpoint. In fact, I could argue that the 1st lien HELOC is the way to go if you prefer a “set it & forget it” method. It’s also a reason why higher percentage of people actually pay off their mortgage with a 1st lien HELOC because of the convenience with the right tools.

But there are other reasons why the 1st lien HELOC can come out ahead depending on your big picture goals.

First, You're investment focused. A first lien line can be much larger than a second-lien HELOC. If you want access to a big line for real estate or a business, that flexibility can matter more than squeezing out the last dollar of interest savings.

Second, You keep a lot of cash sitting in the bank. When your paycheck and savings sit in the line instead of a checking account, they lower the balance every day. The more cash that sits still, the more that helps.

Additionally, there are 1st lien HELOC programs that offer an automated sweep feature. An automated sweep allows the bank to take whatever funds are available on your checking account and automatically “sweeps” it into your HELOC balance as a principal payment on a daily basis. But when you need access to those funds, those funds can be made available in reverse, from the HELOC to your checking account without penalties or fees.

Hence, the 1st lien HELOC can be more convenient due to these type of features.

Is refinancing the same as the HELOC strategy?

No. A refinance can lower your rate or your payment, and you can combine it with the strategy. Some lenders even close a new first mortgage and a second-lien HELOC at the same time. But a refinance on its own doesn't change how interest is calculated or how your cash flow works for you. It also resets your term if you take a new 30-year loan, which can stretch out how long you pay interest.

What should you ask a lender before you switch?

Is the rate fixed or variable? If variable, what index and margin, and are there caps?
How long is the draw period, and does the line limit decrease over time?
Can paychecks sweep into the line automatically?
What are the closing costs, annual fees, and any early closure fees?
Under what conditions can the lender freeze or reduce the line?
What happens when the draw period ends?

The CFPB's HELOC guide is a good place to check these terms before you talk to a lender.

Frequently asked questions

Can a HELOC replace my mortgage? Yes. A first lien HELOC pays off your existing mortgage and takes its place in first position. You then have one revolving line instead of a mortgage.

Is a first lien HELOC better than a mortgage? It depends on your rate and cash flow. In most scenarios I run, keeping the mortgage and adding a second-lien HELOC saves more interest and time. A first lien can win when your current mortgage rate is high or when you want a large line for investing.

What are the risks of using a HELOC as a first mortgage? Your whole balance usually carries a variable rate, so your cost can rise if you’re not using the Accelerated Payoff Strategy. The money is always available, which takes discipline. And the lender can freeze or reduce a line in some situations.

Do I need to refinance to use the HELOC strategy? No. Many homeowners keep their current mortgage and add a second-lien HELOC. Refinancing can be combined with the strategy, but it isn't a substitute for it.

What's the difference between a first lien HELOC and an All In One loan? An All In One loan is one type of first lien line of credit that works like a checking account. Other first lien HELOCs work similarly but may differ on rates, fees, and draw rules. We have resources and referrals to lenders that offer a 1st Lien HELOC with an automated sweep feature.

Run your numbers before you switch

The only way to know if a first lien HELOC beats your current setup is to compare them with your own income, expenses, and rates. Download our free calculator and test both options side by side.

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