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

With the equity you’ve built up in your home over the years, you could be sitting on a lot of money! When you’re ready to put your home’s equity to work, you may be wondering which option is best for you.

Both a home equity line of credit (HELOC) and a second mortgage (such as a home equity loan) let you borrow against the value of the home equity that you’ve accumulated. They both use your home as collateral. But there are big differences in the ways these two options work. 

Loan Proceeds

Perhaps the most obvious difference between a HELOC and a second mortgage is how you get the money. With a HELOC, you’re assigned a line of credit by a lender, and you can borrow against the credit limit over a certain period. By contrast, if you take out a second mortgage, you’ll likely receive all of the money in one lump sum.

Repayment Period

Another difference is the repayment period. Generally, the payoff period for a HELOC can be as long as 20 years. The payoff period for a second mortgage is 5 to 15 years.

Interest Rate

The interest rate for a HELOC might vary over time, while the interest rate for a second mortgage generally is fixed. As such, the monthly payments for a HELOC might change, but you’ll pay the same amount each month with a second mortgage.

Special Considerations

When you’re comparing a HELOC and a second mortgage, take a look at a couple of factors related to the interest:

The annual percentage rate, or APR, for each of these is different. With a HELOC, the APR is based only on the interest, but the APR for a second mortgage includes interest, points, fees and other charges.

When you take out a HELOC, you pay interest only on the amount of the line of credit that you actually use, and not the full amount you’re allowed to use. That means if you decide you need less money later, you won’t need to pay interest on any money you didn’t use. For a second mortgage, you pay interest on the entire lump-sum amount that you receive, even if you don’t need to use the full amount.

Which Is Right for You?

A HELOC might be right for some people, whereas a second mortgage might be right for others.

A HELOC could be right for you if:

• You want the ability to borrow money over time.
• You think you could benefit from a variable-rate loan whose interest rate and monthly payments might go down.
• You don’t mind a repayment period that could last 20 years.
• You’re not exactly sure how much money you might need.

 A second mortgage could be right for you if:

• You would prefer to get all of your borrowed money at once.
• You want to stick with a fixed interest rate and fixed monthly payments.
• You would like a short repayment period of 5 to 15 years.
• You have a pretty good idea of how much money you need to borrow.

Alternative to HELOCs and Second Mortgages

HELOCs and second mortgages aren’t the only lending products you can use to pay for major expenses.

Cash-Out Refinance Loan

When you take out a cash-out refinance loan, you’re replacing your existing mortgage with a new mortgage. If you’ve got enough equity in your home, your cash-out refinance loan will pay off your current mortgage and provide the difference in a lump sum of cash.

HELOCs and second mortgages are separate loans with their own terms, while a cash-out refinance replaces your existing mortgage and allows you to access the equity in your home. You can also use a cash-out refinance to pay off a second mortgage, so you can go back to making just one monthly payment.

A cash-out refinance does mean you’ll either be paying more each month or lengthening the term of your mortgage. That said, you may be able to get a lower interest rate than you did on your first mortgage.

You’ll need to determine your priorities before taking out either a second mortgage or a cash-out refinance.

The Bottom Line

The big difference between a HELOC and a second mortgage is that a HELOC enables you to borrow money over time, whereas a second mortgage gives you proceeds from the loan all at once. In addition, a second mortgage generally comes with a shorter repayment period and a fixed interest rate, while a HELOC generally has a longer repayment period and a variable interest rate.

When weighing whether to get a HELOC or second mortgage, you’ll want to consider whether you want a lump sum of money or a line of credit and whether you’d prefer a fixed interest rate or are OK with an interest rate that could move up or down.

A Barksdale Federal Mortgage Loan Originator can help you determine which type of home equity loan is the best option for you. 

For more information about home equity loans and lines of credit, visit bfcu.org or call/text 318-549-8170 to schedule an appointment with one of our award-winning Mortgage Loan Originators.