HELOC vs. Second Mortgage: What's the Difference?

They both borrow on your equity, but you'll pay them back differently

Couple at a desk with a lender, closing a loan.
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A home equity line of credit (HELOC) and a home equity loan are both additional loans placed against your property or home. Home equity lines of credit are sometimes considered to be a form of second mortgage because both are secured behind another lender that already has the first loan for which your house acts as collateral.

Both types of loans borrow against the equity in your home. The difference is in how the loans are paid out and how they're handled by the bank.

Key Takeaways

  • A second mortgage and a home equity line of credit (HELOC) both use your home as collateral.
  • A second mortgage is paid out in one lump sum at the beginning of the loan, and the term and monthly payments are fixed.
  • A HELOC is a revolving line of credit that allows you to borrow up to a certain amount and make monthly payments on just the balance you've borrowed so far.

What's the Difference Between a HELOC and a Second Mortgage?

Second Mortgages  Home Equity Lines of Credit
You'll receive second mortgage proceeds in one lump sum. The proceeds are held as a credit line that you can spend from and repay as needed.
You must reapply for another loan if you need more money beyond that first lump sum. You can continue borrowing throughout the loan's draw period without reapplying.

A home equity loan, rather than a line of credit, functions as a second mortgage because the money is distributed in a lump sum. A home equity line of credit distributes the money on a revolving basis, something like a credit card. You can repay a portion then borrow it right back again.

How a Second Mortgage Works

A second mortgage uses your home as collateral, just as your primary mortgage does. It allows you to borrow money based on your equity—the difference between what you owe on your first mortgage and your home's fair market value.

A second mortgage is paid out in one lump sum at the beginning of the loan. The payment amount and the term or length of the loan are fixed—they won't change. You would have to open up a new loan to borrow against the equity in your home once again if you need more money after the second mortgage is paid off.

People sometimes use a second mortgage as a down payment on their home in order to avoid private mortgage insurance (PMI). A second mortgage may be termed a "piggyback" loan or a "soft second" mortgage when it's used this way.

Keep in mind, you could lose your home if you miss payments on a second mortgage, just as you could with your primary home loan. Use our mortgage calculator to make sure you can afford the monthly payments before you take on an additional home loan.

How a Home Equity Line of Credit Works

A home equity line of credit is a revolving line of credit. The bank opens a credit line for you and the equity in your home guarantees the loan. As a revolving line of credit, you can borrow up to a certain amount and make monthly payments on the amount you've borrowed. Your payments are determined by how much you currently owe in that particular month.

HELOCs usually have a draw period, such as 10 years. You can only borrow the money during this time. Then there's a repayment period, often as long as 20 years, when you pay the loan back. You don't owe anything on the loan until you start drawing from it.

You can borrow from the HELOC repeatedly up to the line of credit amount, or without applying for another loan after you've paid the balance off, similar to a credit card. But you can put your home at risk if you miss payments on your HELOC, just as with a second mortgage.

Your lender may freeze your line of credit if the value of your home should drop significantly for some reason during the draw period.

Special Considerations

People use both these types of loans for a variety of reasons, such as to cover home repairs or renovations, for debt consolidation, or even to take a nice vacation. But using them to pay off debt is just moving the amount owed from one creditor to another. It only makes sense if the interest rate is significantly less.

You could lose your house if you unexpectedly lose your job or have a serious medical issue and can't make your payments, and these loans cut into the equity that you've built in your home.

It's best to avoid using either of these loans for unnecessary or everyday expenses.

Many people once used HELOCs as emergency funds, letting them stand by unused until they're really needed, but banks tend to discourage this practice. You'd have to tap into the HELOC if you lost your job, but you'd probably have a hard time managing both that repayment and your mortgage payment if you don't find a new job quickly.

Your HELOC payment will also rise as the balance of the loan grows. This can increase the risks of defaulting and losing your home. These loans often have origination fees and closing costs as well, not to mention the interest, making them more expensive than simply saving that cushion of cash.

Work on saving up three to six months worth of expenses to cover any unexpected financial emergencies instead. This puts you in control of your financial stability without risking your home and undercutting the equity you've been working so hard to build.

The Bottom Line

It's important to put a second mortgage or a home equity line of credit in with the rest of your consumer debt in your debt payment plan. And keep in mind that the interest rates on these types of loans are generally higher than those for most first mortgages.