HELOC vs. Second Mortgage: Are They the Same?

A HELOC Is a Type of Second Mortgage, but It Isn't the Only Type

A second mortgage is a loan (against your available home equity) that's secured by your home. It is separate from your primary (or first) mortgage. Since there are different kinds of second mortgages, it can be confusing to understand your options and how each works.

A home equity line of credit (HELOC) is a very popular type of second mortgage. But it isn't the only type. This guide will explain how a HELOC works as well as other options for borrowing against your property.

Is a HELOC a Second Mortgage?

A HELOC is a type of second mortgage because it is an additional loan, separate from your primary mortgage, that's also guaranteed by your home.

However, a HELOC from Freedom Mortgage works differently than your original mortgage loan. You're provided with a lump sum payment, just as you were when you originally borrowed.

However, you also have the opportunity to borrow again during the draw period. This provides you with much more flexibility than a traditional second mortgage which only offers you the single lump sum amount.

What Is a HELOC?

If you're considering using a HELOC to tap into your home equity, you must understand what a home equity line of credit is.

A HELOC allows you access to a line of credit, up to a set limit based on your available home equity and financial situation. You can draw from the line of credit as needed, just like you would charge things on a credit card. However, the interest rate on a HELOC is much lower than the rate on a credit card because your home guarantees the loan.

A HELOC has two separate phases: a draw period (5 – 10 years) and a repayment period (10 – 20 years). During the draw period you borrow cash when you want it and are only required to make interest payments (but you can pay back principal if you choose). Once the repayment period begins, you then repay outstanding principal and interest. HELOCs typically have variable rates. It's important to note that HELOCs offered by Freedom Mortgage do not provide for interest only payments. Since the line of credit is funded at the start, borrowers begin making payments on principal and interest right away.

What Is a Second Mortgage?

A HELOC is one of several types of second mortgages, or loans secured by your home but separate from your primary mortgage.

Your primary mortgage lender always has the first claim to your home. But if you have enough equity, you can use a second mortgage to borrow more money. The additional equity acts as collateral for the new loan, and your second mortgage lender can foreclose if the loan defaults (but can only collect repayment after the first mortgage lender is paid off).

If you're hoping to borrow against equity, you should understand all of the different types of second mortgages available.

Types of Second Mortgages

If you want to borrow equity from your home, the two most common types of second mortgages include HELOCs and home equity loans. There are important differences between them.

HELOC vs. Home Equity Loan

The table below shows the key differences between a HELOC and a home equity loan.

Is a Second Mortgage a Good Idea?

A second mortgage can be a savvy way to help you reach your financial goals. Tapping into equity in your home can be a very affordable way to borrow. You can use the money for important goals such as financing home improvements to build equity in your home or paying down higher-interest debt. A HELOC can also provide flexibility in borrowing, as you generally access the money only when you need it.

Second Mortgage Alternatives

If you don't think a second mortgage is right for you, there are other affordable borrowing options to explore including the following:

• A cash-out refinance loan: This allows you to refinance your current mortgage and borrow more than you owe, allowing you to walk away with a lump sum. Cash-out refinancing gives you one monthly payment, can lower your current rate, and can be a very affordable borrowing option. Among borrowing options, cash-out refinancing typically has the lowest possible rates.
• A personal loan: Personal loans typically have much higher rates than second mortgages but can be approved very quickly. And because they are unsecured loans, you don't put your home at risk of foreclosure.
• A balance transfer credit card: If you're hoping to pay off high interest credit card debt, a balance transfer card can give you a 0% rate for a promotional period. However, your 0% rate only lasts for a short time and then will jump dramatically to the credit card's standard rate.

Final Thoughts: HELOCs as a Second Mortgage

Since a HELOC and home equity loan are both types of second mortgages, you should consider both options when deciding if a second mortgage is right for you. Before you take out either type of loan, you should weigh the pros and cons and explore all borrowing solutions.

To learn more about how a HELOC can save you money and work for your financial needs, apply for a HELOC today. You'll find out how much you qualify for, as well as borrowing costs and terms, so you'll be able to make a fully informed choice about the best loan for your situation.