Defining a "Home Equity First Mortgage"

[Disco Biscuit]

I'm wondering if anyone here knows what this is. Here's the setup (apologies for missing details; my mom hates finances and is bad at keeping up with some details):

My mom has a 30-year mortgage on her house at 4.75%. She currently owes $81k (the house is assessed for taxes around $232k, would probably sell for $250-$280k). I should point out that she bought the house 30 years ago, has refi'd at least once, so I have no idea how much of her 30-year term is left.

She went to the credit union to ask about refi options. The guy at the credit union said she was in perfect position for a "Home Equity First Mortgage," NOT to be confused with a 2nd mortgage using a home equity loan. According to him, not many people

The idea is that she gets the home equity loan at 3.99% and there are no closing fees. Her minimum payment drops by $100, but if she maintains her current payment it's done in 12 years.

Another option is a 15% at a 2.7-something %, but she's not yet sure if there would be closing costs (depends on who owns the loan; again, details).

I can't seem to find much of anything regarding what this guy told her. Does anyone know what he's talking about? It seems like it's just taking a home equity loan out to pay the mortgage, but I'm making sure this isn't some other weird thing I've never heard of.

Thanks!

[K-ice]

First, I am not familiar with the exact term you have in your title.

However, I think we have a similar thing.

We have a HELOC mortgage. It is the only or 1st "mortgage" on the house.

How it work:

House value $100K
HELOC amount $80K

But of that $80K we agreed to get all of it in a 5y fixed 3.8% mortgage.
So our HELOC borrowing power was zero at the start.

However, as we paid down the principle of the "mortgage" the HELOC borrowing power grew.

So a few years later we still owed $30K but we could borrow $50K.

Anyway, I like the flexibility of this HELOC/mortgage combo.

MMM talks about springy debt:

http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

If your mom needs that this type of springy debt then this "mortgage" may be what you want.

[Disco Biscuit]

Thanks for that. I have a feeling this is something similar, but the terminology the guy used simply doesn't come up anywhere I can find. I do think this could be a good way to go for her.

[Hotstreak]

It sounds like a marketing term for a regular mortgage.

[Dicey]

It sounds like a marketing term for a regular mortgage.

Um, no it doesn't. It sounds more like what K-ice explained below.

My questions would be 1. Is the rate fixed? and 2. If your mother pays it down and then needs to borrow against it, will the rate be the same and will it be fixed?

This could be a good product if the rates are guaranteed. if not, consider a straight up re-fi to a new, cheap 15- or 30-year mortgage. Paying off her house is far less important than having a payment that is fixed and affordable.

BTW, lenders can name their loans anything they want to. I suggest you call them yourself and ask questions until you're blue in the face, if that's what it takes to understand what is being offered.

[Hotstreak]

It sounds like a marketing term for a regular mortgage.

Um, no it doesn't. It sounds more like what K-ice explained below.

My questions would be 1. Is the rate fixed? and 2. If your mother pays it down and then needs to borrow against it, will the rate be the same and will it be fixed?

This could be a good product if the rates are guaranteed. if not, consider a straight up re-fi to a new, cheap 15- or 30-year mortgage. Paying off her house is far less important than having a payment that is fixed and affordable.

BTW, lenders can name their loans anything they want to. I suggest you call them yourself and ask questions until you're blue in the face, if that's what it takes to understand what is being offered.

I agree that they can name their products anything they want, and I second your recommendation to contact the bank and ask questions to clarify all of this.  OP, if you have issues, feel free to drop a link to the credit union's website and we can help interpret their marketing.


Diane - Apparently this sounds like different things to different people :).  The parts that stood out to me indicating it was most likely a regular refinance, are that i.) the Credit Union quoted a 12 year repayment period, which they could only do for a fully fixed rate option ii.) there's no disclosure of 'variable', 'adjustable', 'line of credit', or any other hallmarks of a HELOC.  In my experience those are some of the first things the banker would bring up, especially with all the new scrutiny that came out of the recent recession.  iii.) her payment would only drop $100, so it surely is not interest only  iv.) It's becoming common for Bank's and CU's to offer "no fee" refinance programs, and the pricing being offered is roughly in line with those (and too low of a rate for a HELOC fixed rate option of 12 years, IME).  This no fee refinance is what I'm referring to as a regular mortgage in my other post, since it's fixed rate, fully amortized, and first position.  I'm curious what stood out to you indicating it was a "HELOC Mortgage" as K-Ice described (which from the sound of it was a standard HELOC FRO).


ETA:

If your mother pays it down and then needs to borrow against it, will the rate be the same and will it be fixed?

I can't imagine that even a credit union would offer an open ended fixed rate loan!  They do some wild stuff, sure, but that.. is beyond the pale.

[K-ice]

I'm curious what stood out to you indicating it was a "HELOC Mortgage"..?

Personally, I guess it was just the term "equity" that made me think it was a HELOC structure.

But you are all right, every bank calls their products different things and it is very hard to know exactly what they are talking about.

Some examples:

"Home Equity FlexLine"
"Home Power Plan"
"Homeline Plan™"

Funny, not funny, story. I know someone who had a huge HELOC but bragged that they had "no mortgage". The fool was also proud to just pay the interest only payments while they spent the rest of their money on gambling and girlfriends.

For someone like that, a traditional locked in mortgage is better.

[Petunia 100]

Typically, HELOCs are variable, but allow you to lock in a portion for a fixed term at a fixed rate.   It sounds to me that this is what Credit Union Guy is suggesting.  The rate is probably higher than your mom could get on a new fixed rate mortgage.  But, there are no closing costs with the HELOC.

The HELOC becomes a "first mortgage" because your mom would use the proceeds to pay off her existing mortgage, putting the HELOC in first position.

[redcedar]

The issue is that a mortgage product, uses almost entirely as a second mortgage, has taken on the public perception of a second mortgage. The product is not tied to lien position. It could be a first, second, third, or even tenth mortgage if allowed by the bank.

HELOCs as a first mortgage do exist more than many people realize. They were originally a second mortgage but are now a first mortgage after the homeowner paid off the original first mortgage.

So,yes this is doable, legit, and not a scam.

Compare terms with any other mortgage product and go with the one that makes the most sense.

[Dicey]

And to all of these good comments, I would add, "Don't be afraid of fees." In some cases, paying limited fees which result in lower rates can be a smart move. So the type and amount of fees can vary wildly, but not all are bad.

I can't imagine that even a credit union would offer an open ended fixed rate loan!  They do some wild stuff, sure, but that.. is beyond the pale.

Which is why I'd just look for a fixed rate, traditional mortgage.

It sounds like a marketing term for a regular mortgage.

Um, no it doesn't. It sounds more like what K-ice explained below...

This could be a good product if the rates are guaranteed. if not, consider a straight up re-fi to a new, cheap 15- or 30-year mortgage. Paying off her house is far less important than having a payment that is fixed and affordable.

Diane...I'm curious what stood out to you indicating it was a "HELOC Mortgage" as K-Ice described (which from the sound of it was a standard HELOC FRO).

Um, because I thought it did not sound like a "regular mortgage"... And, I did not see the word "fixed" anywhere in the OP, which was another red flag. So my guess, based on experience, was that K-ice was closer to the pin.