What Is the Difference Between a HELOC and a Second Mortgage?

Homeowners often find a significant financial resource in their property’s equity. This value can be accessed through various financial products to fund large expenses or manage personal finances. Among the most common methods are Home Equity Lines of Credit (HELOCs) and Home Equity Loans, often called second mortgages. While both allow property owners to tap into their home’s value, their structures, fund access, and repayment terms differ.

Understanding Home Equity Lines of Credit (HELOCs)

A Home Equity Line of Credit provides homeowners with a revolving credit line, similar to a credit card, allowing them to borrow funds as needed up to a pre-approved maximum amount. This tool has two distinct phases governing fund access and repayment. The initial phase, the “draw period,” typically lasts 5 to 10 years.

During the draw period, homeowners can repeatedly borrow against their credit line. Payments are often interest-only, offering lower monthly obligations but not reducing the principal balance. Once the draw period concludes, the HELOC transitions into the “repayment period,” which commonly extends for 10 to 20 years.

In the repayment period, new withdrawals are no longer permitted. Borrowers must make regular payments covering both principal and accrued interest. HELOCs feature variable interest rates, meaning the interest charged can fluctuate based on an underlying index, such as the Prime Rate, plus a lender-set margin.

Understanding Home Equity Loans (Second Mortgages)

A home equity loan provides the borrower with a single, lump-sum disbursement of funds at loan closing. The entire approved loan amount is received upfront, offering immediate access to a larger sum. The term “second mortgage” is often applied because these loans establish a second lien on the property.

This second lien is subordinate to the primary mortgage, meaning the original home loan maintains priority in a foreclosure. Home equity loans feature a fixed interest rate for the entire loan term. This fixed rate ensures monthly payments for principal and interest remain constant, providing stability for financial planning.

Repayment terms for home equity loans commonly range from 5 to 30 years, with a consistent payment schedule from the outset. This loan type is often chosen when a homeowner requires a specific, larger amount for a defined purpose. The fixed terms and steady payments offer a clear repayment pathway.

Key Distinctions Between HELOCs and Home Equity Loans

The fundamental differences between a HELOC and a home equity loan lie in fund disbursement, interest rates, and repayment structures. A HELOC offers a flexible line of credit where funds are accessed as needed, allowing for multiple draws up to the approved limit over its draw period. In contrast, a home equity loan provides a single, lump-sum payment upfront, granting immediate access to the full borrowed amount.

Interest rates represent another significant divergence; HELOCs typically have variable interest rates that can change over time, influenced by market fluctuations. Conversely, home equity loans generally feature fixed interest rates, ensuring constant interest charges and monthly payments throughout the loan’s duration, which provides predictability for budgeting.

Repayment also varies between the two products. A HELOC involves a draw period, often with interest-only payments, followed by a separate repayment period where principal and interest are due. A home equity loan, however, requires fixed principal and interest payments from the very beginning of the loan term, maintaining a consistent repayment schedule until the loan is satisfied. These distinctions underscore the differing applications and benefits each product offers homeowners.