||Ask Dr. Don
Home equity vs. second mortgage
Dear Dr. Don,
What is the difference between a home equity
line and a second mortgage?
Carol Ann Creditwise
Dear Carol Ann,
A home equity line of credit (HELOC) is a second mortgage,
but a second mortgage isn't necessarily a home equity line.
A line of credit is a commitment by a lender to lend
up to the amount of the line over the term of the loan. A mortgage
is a secured loan backed by the value of your home. The home equity
line of credit is a mortgage because it's backed by the value of
Like a first mortgage, a second mortgage is secured
by the value of the home, but the holder of the second mortgage
isn't entitled to any proceeds from the sale of the home until the
first mortgagee has been paid. So the commonality between the home
equity line and the second mortgage is the second-in-line status
of the lender.
HELOCs and home equity loans are both types of second
mortgages because the loans are secured by the home's value. So
a second mortgage can be either.
A HELOC is a more flexible form of financing than
a home equity loan because the homeowner can borrow up to the line
of credit, pay the balance down and borrow the money again over
the term of the loan agreement. In contrast, a home equity loan
is for a defined amount and repaid in equal payments over the loan
Home equity loans have a fixed interest rate. HELOCs
are variable-rate loans where the interest rate fluctuates with
changes in the interest rate of the index that the loan is based
upon. For example, the interest rate on many HELOCs is based on
the prime lending rate. Changes in the prime rate will trigger changes
in the HELOC's interest rate.
-- Posted: April 4, 2002