Second Mortgage vs. Home Equity Line of Credit

If you own your home, you are living in one of the best sources for low-cost financing available. By using your home as collateral for a loan, you can get significantly lower interest rates than you would with a credit card or unsecured loan.

There are a couple different avenues for borrowing against your home. The two that most often get confused with each other are a second mortgage and a home equity line of credit (HELOC). This is because a second mortgage is often called a home equity loan (HEL), which sounds similar to a home equity line of credit but is substantially different. Here’s how:

What is a second mortgage?

A second mortgage is a loan that you receive on top of your current mortgage that also uses your home as collateral. You receive the money from your second mortgage as a lump sum and repay it in monthly installments along with interest that is usually charged at a fixed-rate.

What is a home equity line of credit?

A home equity line of credit is a revolving credit account that is secured by your home. But instead of receiving your loan in a lump sum, you can withdraw funds and repay them as needed, much like you would with a credit card. You can borrow up to a certain amount, which is determined by the equity in your home and your credit rating. Your interest rate can be fixed or variable.

What are the advantages of a second mortgage?

A second mortgage is best for one-time expenses, such as home improvements and debt consolidation. The fixed interest rate and monthly payments allows you to budget and plan ahead with little surprises. Unlike a home equity line of credit, you will not have to pay annual fees.

What are the advantages of a home equity line of credit?

A home equity line of credit works for ongoing or unforeseen expenses, such as college tuition, medical expenses and other costs. You have the flexibility to withdraw large sums of money as needed or borrow very little and therefore pay little interest. Home equity lines of credit often do not have the closing costs that are associated with a second mortgages. As such, a home equity line of credit may be significantly less expensive, since you can borrow conservatively and repay early.

Other Considerations

Both a home equity line of credit and a second mortgage use your home as a collateral - defaulting on either could result in foreclosure of your home. Also, either or both options may have tax-deductible interest. Consult with your tax adviser and financial planner to determine which route is best for you.

Second Mortgage vs. Home Equity Line of Credit

What is a second mortgage?

What is a home equity line of credit?

What are the advantages of a second mortgage?

What are the advantages of a home equity line of credit?

Other Considerations

Related Blog Post