27 Apr Using a First Position Line of Credit – Part 1
What’s a First Position Line of Credit?
Last week, a Canadian friend of mine asked how CashMap’s line of strategy works with a first position line of credit. In Canada, first position lines of credit are readily available. In British Columbia, Vancity Credit Union, Manulife and Envision Financial – Red Frog are just a few of the financial institutions that offer first position lines of credit.
Most of you are accustomed to seeing home equity lines of credit in a second position behind your traditional mortgage. So, what’s the difference?
A first position line of credit looks like a home equity line of credit; however, should you default on your loan, the bank is in first position to claim your home. This means if you are financing your home with a first position line of credit, the first position line of credit is your mortgage.
Differences Between the U.S. and Canada
In Canada, most home equity line of credit products are interest only for as long as you own your home. You never have to have another appraisal ordered and worry about your line of credit being reduced. Unlike the U.S., there isn’t a ten-year interest only provision that converts to a traditional twenty-year payment term.
In the U.S., at the end of the interest only period, you can start the clock over again by refinancing your line of credit. To do this your credit history will be reviewed, your house will be appraised and, you’ll provide income documentation to confirm your ability to repay the line. Based on the bank’s underwriting guidelines, a new line of credit will be offered.
Using CashMap’s Strategy with Your First Position Line of Credit
A first position line of credit is a great way of keeping your dollars working for you 24/7. Use automatic loan payment to shift all your income to the line of credit. This immediately lowers your mortgage balance. By paying your living expenses at the end of line of credit’s billing cycle, you’ll minimize the interest that you owe. Each month after all your bills are paid, your remaining dollars lower your balance on your line of credit. It’s not something you have to think about. This means that if you are sticking to your budget, your balance will fall faster than a traditional mortgage.
Using a first position line of credit enables you to use almost all the elements of CashMap’s line of credit strategy. What’s missing? You’re not using any of your bank’s dollars to boost paying down your mortgage.
If you’d like to leverage your bank’s dollars, get a small traditional line of credit and manage your first position line of credit like a traditional mortgage. You’ll make withdrawals from the smaller line making additional payments to your larger line and you’ll make regular principal and interest payments to your larger line. In my next post I’ll compare the two strategies.
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