One of the biggest questions we receive from homeowners looking for a home equity solution is: Is a HELOC considered a second mortgage?
The short answer is yes—a home equity line of credit (HELOC) is a type of second mortgage, but there are some significant differences.
HELOCs differ from traditional second mortgages in terms of the following:
- Structure
- Flexibility
- Use
In this article, we’ll explain what makes a HELOC a second mortgage, how it works, and why it might be the right financial tool for you.
What makes an equity product a “second mortgage?”
Second mortgages are any loan or line of credit secured by the home but are subordinate to the primary mortgage.
This means it’s a secondary lien on your property, meaning your primary mortgage lender gets paid first if you sell your home or face foreclosure.
Second mortgages are a popular way for homeowners to access equity without refinancing their primary loan.
Common types of second mortgages include:
- Home equity loans: Lump-sum loans with fixed repayment terms.
- Home equity lines of credit (HELOCs): Revolving lines of credit allow you to withdraw funds as needed.
Because HELOCs fall under the umbrella of second mortgages, they share certain characteristics but also have distinct features that make them more flexible than traditional second mortgages.
How does a HELOC work?
A HELOC allows homeowners to borrow against their home equity using a revolving line of credit.
Unlike a fixed-term loan, a HELOC offers flexibility, allowing you to withdraw funds as needed during a draw period—typically 5 to 10 years.
Here’s how a HELOC typically works:
- Draw period: The initial phase, during which you can access your credit line and pay interest only on the amount you borrow.
- Repayment period: After the draw period ends, you repay the principal and interest over a set term, usually 10 to 20 years.
Since your home secures a HELOC, it functions as a second mortgage, but its revolving nature makes it distinct from lump-sum home equity loans.
How is a HELOC different from other second mortgages?
While all second mortgages leverage your home as collateral, HELOCs differ in key ways.
Flexible borrowing
Unlike a traditional second mortgage that provides a lump sum, a HELOC acts as a revolving credit line.
You can withdraw only as many funds as needed up to your credit limit. It can be an ideal option for expenses that arise over time, such as home improvements or educational costs.
Interest-only payments
Most HELOCs allow you to make interest-only payments during the draw period, reducing your monthly financial obligations. Traditional second mortgages require fixed monthly payments on both principal and interest.
Variable interest rates
Variable interest rates are the standard for HELOCs and will adjust based on market conditions. Traditional second mortgages, on the other hand, will often have fixed rates.
While variable rates add some unpredictability, the initial rates on HELOCs are often lower than those of fixed-rate loans.
Why is a HELOC considered a second mortgage?
A HELOC is considered a second mortgage because your home secures it and exists alongside your primary mortgage.
Lenders place a lien on your property for the HELOC, which makes it subordinate to your first mortgage.
This structure means the lender for your first mortgage is given priority in case of default or foreclosure, while the HELOC lender is paid from any remaining proceeds.
Benefits of using a HELOC
HELOCs are a popular choice for homeowners due to their flexibility and affordability. The following are some of the key advantages of HELOCs.
Access to low-cost funds
Since your home secures HELOCs, they often come with lower interest rates than unsecured loans like personal loans or credit cards.
This makes them a cost-effective solution for large expenses.
Borrow as needed
HELOCs offer flexibility, allowing you to borrow only what you need when needed. This is especially useful for ongoing projects like home remodeling, where expenses vary.
Potential tax advantages
If HELOC funds are used for qualified home improvements, the interest paid may be tax-deductible. It’s advisable to consult a tax professional to determine your eligibility.
Preserve your primary mortgage terms
With a HELOC, you can access your equity without refinancing your primary mortgage, preserving favorable terms like low interest rates.
When is a HELOC a good choice?
A HELOC is ideal for homeowners with sufficient equity who need flexible access to funds.
Common use cases include:
- Home improvements: Upgrade your property to increase its value or enhance living spaces
- Debt consolidation: Pay off high-interest debts and/or streamline any remaining payments into one lower-interest account.
- Emergency expenses: Cover unexpected costs without dipping into savings.
- Education costs: Fund tuition or other educational expenses over time.
Why HomeEQ makes HELOCs easier
When choosing a HELOC, HomeEQ offers a fast, borrower-friendly alternative to traditional lenders.
Here’s why HomeEQ stands out:
- Fully digital process: Apply online 24/7 without needing to visit a branch or complete mountains of paperwork.
- Soft credit checks: HomeEQ’s use of soft pulls allows you to explore your options without impacting your credit score.
- No loan officers required: Manage the process independently and avoid delays caused by unnecessary intermediaries.
- Fast funding: Successful applicants can access their funds by the end of the application process.
Considering HELOCS: The wrap-up
So, is a HELOC considered a second mortgage? Yes, but it’s uniquely flexible and affordable.
By allowing homeowners to borrow against their equity through a revolving line of credit, a HELOC offers benefits that traditional second mortgages can’t match.
Whether funding home improvements, consolidating debt, or covering unexpected expenses, a HELOC can be a powerful financial tool for the right homeowners and situation.
With its fully digital application process and borrower-focused features, HomeEQ makes it easier than ever to secure a HELOC.
Get started with your HomeEQ HELOC application; you could get approved in minutes!