HELOC vs second mortgage: What’s the difference?

If you’re looking for an affordable way to borrow money, you have a strong advantage as a homeowner. More than 84 million Americans had access to a median amount of $254,000 in tappable home equity during the first quarter of 2024, according to a report from TransUnion. 

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In order to use those funds, you’ll need to choose what type of home equity financing product to apply for. Most borrowers opt for a second mortgage or a HELOC, which lets you keep your first mortgage in place. Let’s look at some of the differences between the two to see which might be right for your family.  

Second mortgage vs HELOC

Technically speaking, a HELOC is a second mortgage, which is defined as any type of debt you take out against the equity in your home while you’re still paying off another home debt, like your main mortgage. In practice, however, most people are referring to a home equity loan when they say “second mortgage.” 

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Second mortgages and HELOCs have many similar requirements, such as having a credit score of 720 or higher and at least 20% equity in your home. Both options require you to go through an underwriting process similar to when you took out your first mortgage, with similar closing costs. The way that HELOCs vs second mortgages work in practice, however, is very different. 

How a second mortgage works

A home equity loan is a type of second mortgage that allows upfront access to a lump sum of funds, to be repaid with steady payments over time. Once the loan is made, you can’t access more funding without applying for a new loan. 

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Each payment you make is amortized so that you pay back the amount you borrowed, plus interest, over the course of five to 30 years. Home equity loans charge fixed interest rates which means your mortgage payments will stay the same over time, regardless of whether rates go up or down in the future.

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Choose a second mortgage if: you want access to a lump sum of funds, with a stable monthly payment and a lower interest rate. 

How a HELOC works

A home equity line of credit (HELOC) is structured as a more flexible way to borrow but comes with increased complexity as well as higher financing costs in the form of greater interest rates and fees. Typical HELOCs are split up into two phases: a draw phase and a repayment phase. 

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You’ll begin in the draw period, which lasts for five to 10 years. During this time you can borrow up to your credit limit while only making interest-only payments, although you can pay more to pay down your debt and refresh your line of credit. Access to your credit line stops when you enter the repayment period, when it converts to a variable-rate loan and you begin making payments for 10 to 20 more years. 

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Choose a HELOC if: you’re willing to pay a higher rate and additional fees for the freedom to borrow more funds as you need, with the option of making smaller interest-only payments for a period of time. Make sure you can afford the higher monthly payments during the repayment phase, however. 

How do HELOCs compare to other home equity financing options?

We’ve covered the main differences between HELOCs and home equity loans. If you’re sure you don’t want an unsecured option like a personal loan and prefer financing that’s secured by your home, make sure you consider these other two borrowing methods. 

HELOC vs cash-out refinance

A cash-out refinance is a type of mortgage loan that replaces your current primary mortgage with a larger loan amount. You get the difference back as cash, available to use immediately, similar to a home equity loan. This often lets you finance purchases over a longer period of time since you’re rolling the debt in with an entire mortgage. 

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It’s a less flexible way to borrow money than a HELOC since you can’t continually draw against available funds, but it can be a good option if you need access to a lump sum and can qualify for a lower mortgage rate at the same time. 

HELOC vs home equity investment

A home equity investment (HEI) offers several benefits over HELOCs if you need access to a lump sum of funds. Homeowners may be able to qualify with a lower credit score of just 500 (as opposed to an average of 720 or higher with a HELOC), and there’s no need for monthly payments at all since you’ll repay the funds — along with a share of your home’s future equity — in 30 years. 

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No one knows what the future holds, so you can’t predict how much you’ll pay for the funding like you can with a second mortgage offering fixed interest rates — but then again, the same is true of HELOCs with their variable interest rate structure as well.

When is a second mortgage a good idea?

A second mortgage (home equity loan or HELOC) can be a particularly good option if you’re looking for funding access “to buy, build, or substantially improve” your real estate portfolio because you can deduct the interest you pay on your tax return in these scenarios. This includes home improvements to your own residence, so if you’ve been looking to install solar panels, redo your landscaping, or add a mother-in-law suite, a second mortgage can be a strong option. 

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Second mortgages are also popular for people looking to consolidate credit card debt, which can also work. Many experts caution against this, however, or at least recommend taking more care to make sure these consolidated debts are always paid on time. That’s because a second mortgage uses your home as collateral. If you default on this loan, your lender can foreclose on your home, which they wouldn’t be able to do with credit card debt.  

Final thoughts

Regardless of which option you choose — second mortgage or HELOC — it’s extra important to make sure you stay current on your payments. You’ve worked hard for the equity built up in your home, and you don’t want to risk losing it. 

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It’s a good idea to put your payments on autopay so you don’t miss any. Starting a budget, and then following it closely each month, can help ensure you always have enough money to make those payments and save up for long-term goals at the same time. That’s especially true if you opt for a HELOC, because your monthly payments can vary a lot over time, especially when you make the transition from the draw phase to the repayment phase. If you are interested in a home equity solution with no monthly payments, consider an HEI from Point. It takes under 60 seconds to prequalify. 

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