Is a HELOC the Same as a Second Mortgage?

Homeowners can tap into their home equity when they need access to cash.

If you’re thinking about borrowing against your home, you might have heard of a second mortgage or a home equity line of credit, as alternatives to selling your home.

Both allow homeowners to borrow against their home equity, but they work differently, particularly in how the loans are structured and how the money is borrowed and repaid.

Here’s what homeowners should know about a second mortgage and how a HELOC compares.

What is a second mortgage?

A second mortgage is any loan secured by your home, separate from your primary or original mortgage.

The loan is called a “second” mortgage because it’s secondary to your first mortgage. If your home is sold in a foreclosure, the first mortgage is typically repaid before the second mortgage.

Home equity loans and home equity lines of credit are common examples of second mortgages.

What is a HELOC?

A home equity line of credit, or HELOC, is a revolving line of credit secured by home equity. The credit line uses your home as collateral.

Unlike a home equity loan, you don’t receive a lump sum with a HELOC. A lender approves you for a credit limit, which you can borrow against as needed, then repay and borrow again during the draw period. Interest is charged only on how much you borrow and not your entire credit limit.

What’s the difference between a HELOC and a second mortgage?

A home equity line of credit, or HELOC, is a common example of a second mortgage.

You can have a home equity line of credit, even if you have an outstanding mortgage, although some lenders may have borrowing limits.

Is a home equity loan a second mortgage?

Yes, a home equity loan is considered a second mortgage because it is secured by your home and sits behind your primary mortgage.

Unlike a home equity line of credit, a home equity loan provides a one-time lump sum of funds to be repaid over a fixed period. Many home equity loans have a fixed rate and fixed monthly payments over the set period.

In contrast, a home equity line of credit may have variable rates. Monthly payments can also differ based on how much you borrow, for example. HELOCs work differently than home equity loans.

Which is the better second mortgage option: a home equity loan or a HELOC?

The better option depends on your financial circumstances and how you plan to use the money from the loan.

A home equity loan may be better if:

• You want to borrow a specific amount of money at once.
• You want a predictable repayment schedule with fixed monthly payments and a set period for pay-off.
• You prefer a fixed interest rate. (Some home equity loans may have variable interest rates, but fixed interest rates are generally more common among home equity loans.)

A home equity line of credit may be better if:

• You want to borrow over time instead of only once.
• You want to open a revolving line of credit, but may not necessarily need to use it right away.
• You are OK with a variable interest rate. (Many HELOCs offer variable interest rates, although there are some that may have fixed rates.)

The bottom line

A second mortgage is a broad category of loans secured by your home. The name refers to the position they have after your primary mortgage. Some common second mortgages include home equity loans and home equity lines of credit.

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This post is for informational purposes only and does not provide any financial, investment or tax advice. The information presented may not be suitable for your individual circumstances. Before making any financial decisions, consider consulting a qualified professional who can provide advice based on your specific situation.