Your home is one of your most valuable assets. Tapping into its equity can provide financial flexibility for major expenses like home renovations, debt consolidation, major purchases, or unexpected costs.
But with multiple borrowing options available, how do you know which one is best for you?
Second mortgages, including home equity loans and home equity lines of credit (HELOCs), each allow homeowners to tap into home equity, but they work in different ways.
In this guide, we’ll break down the differences between a second mortgage vs HELOCs and home equity loans. We’ll highlight the pros and cons to help you determine the right fit for your financial needs.
Apply with Figure’s 100% online application in minutes with funding in as few as 5 days.2navigates to numbered disclaimer
What is a second mortgage?
A second mortgage allows homeowners to borrow against the equity they’ve built in their home while keeping their existing (first) mortgage intact.
The two most common types of second mortgages are home equity loans and HELOCs. Both loans give homeowners access to funds based on the amount of equity in their home, but they differ in how they are structured and repaid.
It’s important to note that while home equity loans and HELOCs are often second mortgages, they can also be a first lien if no existing mortgage is in place.
Because the home secures these loans, home equity loans and HELOCs may offer lower interest rates compared to unsecured alternatives such as personal loans or credit cards.
What is a home equity loan?
Home equity loans are distributed in a lump sum of money that is repaid over a fixed term with a fixed interest rate.
The amount you can borrow depends on your loan-to-value ratio (LTV), the amount of equity you’ve built in your home, and your credit history. Typically, lenders allow homeowners to borrow up to 80% of their home’s value, minus the amount you still owe on your primary mortgage.
For example, if your home is worth $400,000 and you owe $250,000 on your primary mortgage, you may be able to borrow up to $70,000, depending on the lender’s terms.
What is a HELOC?
HELOCs operate as a revolving line of credit. Instead of receiving a one-time loan amount as you would with a traditional loan, a HELOC gives you a borrowing (or credit) limit.
As you repay the balance, you can withdraw money from the credit line as you need it.
Traditional HELOCs are divided into two phases: a draw period and repayment period.
With Figure’s HELOC, you have the flexibility to choose a repayment term of 5, 10, 15, or 30 years.5navigates to numbered disclaimer Once you select your term, you have the entire period to pay off your Figure HELOC, with no separate draw or repayment phases. This means you can draw funds and repay principal and interest throughout the loan term.
Second mortgage vs home equity loan: Key differences
Home equity loans are a specific type of second mortgage, but not all second mortgages are home equity loans.
Let’s look at the key differences between a second mortgage vs. home equity loan:
Definition and scope: “Second mortgage” refers to any loan secured against your home that is subordinate to your first mortgage, while home equity loans are a specific type of second mortgage where you borrow a fixed amount in a lump sum and repay over a set term.
Loan structure: Second mortgages include various borrowing structures, while home equity loans are structured as a lump sum.
Interest rates: Second mortgage rates may be fixed or variable depending on the loan type, while home equity loans are typically always fixed.
Uses: Home equity loans are best suited for large, one-time expenses, while second mortgages may provide a range of flexible options depending on the type.
Second mortgage vs HELOC: Key differences
HELOCs are among the most popular types of second mortgages.
Let’s look at the differences between a second mortgage vs. home equity line of credit:
Loan disbursement: The major difference between a HELOC and second mortgage is the disbursement—HELOCs function as a revolving line of credit, while second mortgages can take on different structures depending on loan type (including a lump sum).
Repayment terms: Traditional HELOCs typically begin with an interest-only draw period followed by a repayment phase, while second mortgages may either require immediate payment or two phases. Figure’s HELOC has no separate draw and repayment phases, meaning you can draw funds and repay principal and interest throughout the loan term.
HELOC vs second mortgage rates: Traditional bank HELOCs often have variable interest rates, while second mortgage rates can be fixed or variable. Figure’s HELOC gives you the full amount upfront with a fixed interest rate1navigates to numbered disclaimer.
HELOCs can also serve as a first lien to borrow against home equity, even if you own your home with no current mortgage balance.
HELOC vs home equity loan: Key differences
Since HELOCs and home equity loans are your two main equity-tapping options, how do you know which type of second mortgage is better suited to your needs?
These two loan options differ in three main ways:
Access to funds: Home equity loans provide the entire loan amount at once, while traditional HELOCs allow you to pull out what you need during the draw period.
Figure’s HELOC gives you the full amount upfront, but like a traditional HELOC, you can borrow again once part of the principal is repaid.
Repayment: Home equity loans require fixed monthly payments from the start, while traditional HELOCs start with an interest-only draw period followed by a repayment phase.
Figure’s HELOC allows you to draw funds and repay principal and interest throughout the loan term, with no separate draw and repayment phases.
Interest rates: Traditional HELOCs typically have variable interest rates, while home equity loans have fixed rates.
Figure’s HELOC gives you the full amount upfront with a fixed interest rate1navigates to numbered disclaimer.
When to consider a home equity line of credit (HELOC)
A HELOC might be the right choice if:
You need ongoing access to funds for recurring expenses, such as home repairs, tuition, or medical bills.
You prefer the flexibility to borrow, pay back, and borrow again as needed.
When to consider a home equity loan
A home equity loan may be the better option if:
You need a large, upfront sum of money for a major, one-time expense, like a home renovation or debt consolidation.
You have a clear budget and repayment plan for your borrowing needs.
Pros and cons of a second mortgage
Second mortgages help homeowners access their home equity without touching their primary mortgage.
They are a valuable tool in today’s market, but they may not be right for every borrower. Let’s look at the pros and cons of a second mortgage.
Pros of a second mortgage
Access to large amounts of cash by leveraging home equity
Low interest rates compared to unsecured loans4navigates to numbered disclaimer
Flexible loan options
Useful method for debt consolidation
Cons of a second mortgage
Puts your home at risk if you default
Closing costs and fees
Additional debt obligation
If you’re considering a second mortgage, compare loan terms and lender benefits to find the best solution for your needs.
Get the funds you need now with Figure
Choosing the right lender for your second mortgage is just as important as selecting the right loan type.
With Figure, you can access your home equity quickly and conveniently. We offer a 100% online application—with approval in as fast as five minutes and funds in as few as five business days2navigates to numbered disclaimer.
Homeowners borrow the full loan amount at time of origination, with a fixed rate1navigates to numbered disclaimer. Borrowers can access up to $400,000 depending on home value, equity, and credit profile3navigates to numbered disclaimer.
Ready to get started? Apply today!
Frequently asked questions about second mortgages
Is a HELOC a second mortgage?
Yes, a home equity line of credit (HELOC) can be a type of second mortgage because it is secured by your home and can exist in addition to a primary mortgage. A HELOC works as a revolving line of credit, allowing you to borrow as needed, repay, and borrow again up to the credit limit. While HELOCs typically have variable interest rates, some lenders, like Figure, offer a fixed-rate draw option for added stability.1navigates to numbered disclaimer
HELOCs aren’t always a second mortgage. They can sit in the first lien position if you don’t have a current mortgage in place.
Is a home equity loan a second mortgage?
Yes, home equity loans are another type of second mortgage that allow homeowners to borrow against their home’s equity. Home equity loans provide an upfront lump sum of cash with a fixed interest rate and set repayment schedule. This makes them a good option for borrowers who need a predictable payment structure and a specific amount of funding.
Like HELOCs, home equity loans can also serve as first liens when there is no current mortgage in place.
