A caller to The Ramsey Show (1) recently wanted to know whether she was in the right for being wary of a TikToker’s financial advice, or if she was “crushing” her husband’s dreams.
Brooke from Baton Rouge, La., said that her husband was keen on an idea from a TikToker who was promoting first-lien HELOCs.
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“I’m very hesitant about it,” Brooke said in the call. “In fact, my family gives me the name ‘dream crusher.’ because I’m just not a risk taker.”
But co-hosts Jade Warshaw and John Delony were squarely in Brooke’s corner when it came to the idea — and on the prospect of taking advice from “finfluencers.”
“Hey, here’s my big problem number one, Brooke: Your husband’s quote, ‘following a TikToker,’” Delony laughed.
Brooke agreed, saying that she looked at the numbers and didn’t see a way that the plan made sense.
What is a first-lien HELOC?
Whereas HELOCs are typically second mortgages, a first-lien HELOC is a line of credit that replaces your existing mortgage.
If you defaulted on a home loan, the first-lien lender would be first in line to be repaid — traditionally the mortgage lender. So, when you take a first-lien HELOC, it moves into first position.
According to consumer credit reporting agency Experian (2), people who choose a first-lien HELOC often do so for “access to equity and initial interest-only payments,” using the money for home renovations, investments or for debt consolidation.
Similar to a regular HELOC, a first-lien HELOC usually has a draw period, when you’re able to borrow and repay funds, like a credit card, and a repayment period where you can’t withdraw funds and you have to repay the principal and interest.
While a mortgage can have a fixed or a variable interest rate, a HELOC’s interest rate is variable, and is “calculated daily based on your outstanding balance,” according to Experian. That’s why it can be “a smart idea to repay whatever you can during the draw period, even if you’re not required to,” Experian adds.
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‘It’s just total madness’
For Ramsey Show caller Brooke, the question the hosts had was: Why does your husband want to get a first-lien HELOC?
“What’s the purpose of it — the grand purpose in his mind?” Warshaw asked. “‘We need to get the first-lien HELOC because I need to get a boat,’ or ‘Because we’re funding college.’ Like, what’s the why?”
Brooke said that because they are in their 50s, the idea was to pay off their mortgage before they’re retired. They still owe about $220,000 on their mortgage, and the TikToker that her husband follows claims that the first-lien HELOC can allow people to pay off their mortgage in three to six years.
“The why is [to] pay [the home] off in three to six years,” Brooke said. “But we don’t have, like, this huge income, like, minus our debts that we have to even throw at this HELOC. Because that’s what it seems like to me that you need. You need this huge income.”
Delony said that there’s no “secret atomic way to make you owe less than $200,000 on your mortgage.” While “there might be a way that you can reduce your interest rate,” he explained, “There’s not a way to contract time or to contract money from what you owe.”
Brooke’s mortgage currently has a 2.75% interest rate, and she said she was seeing daily rates for HELOCs at 8%.
When Warshaw heard that those HELOC rates were also variable, she said, “That’s scary.”
“I’m trying to say this in a non-incredulous way, but truly I can see no good in this,” she added.
Delony agreed that the high variable interest rate on the first-lien HELOC versus the 2.75% rate Brooke already had was a no-brainer. Plus, with the HELOC, there is the temptation to spend.
“You’d have to be superhuman to never spend this line of credit,” Delony said. “There’s no way you’re going to get a better interest rate. It’s a credit card at a variable rate that’s higher than your mortgage. Like, there’s no possible win here.”
The hosts advised Brooke that she should write out a plan for how much they’d have to pay every month to pay down their mortgage in 72 months, and then ask her husband to run the numbers on the first-lien HELOC, and how it would save them money — factoring in that interest rates could go up.
Warshaw noted again that the HELOC also comes with a temptation to spend.
Delony agreed, “It’s just total madness.”
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This article originally appeared on Moneywise.com under the title: A couple owes $220K at 2.75% — and a TikToker wants them to swap it for an 8% variable HELOC
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