HELOC vs. second mortgage: Which is right for you?

For many people, their home is the most valuable thing they own, but all of that value is tied up in equity you can’t use to pay for things. If you’re hoping to start a project like a kitchen renovation or need cash for other purposes, you might want to take cash out of your equity for that purpose.

Second mortgages are a frequent choice for many homeowners, with second-lien mortgages increasing by 22% year over year in the first quarter of 2025.

There are two types of second mortgages you can get. Home equity loans, which offer a lump sum payment, are the ones that people most often associate with the term second mortgage. There are also home equity lines of credit (HELOCs). We’ll break down the differences between a second mortgage vs. a HELOC and help you decide if one of these is right for you.

Rocket Mortgage® does not offer HELOCs at this time but we’re here to help you decide what might be right for you if you want to access your home equity.

Home equity loan vs. HELOC: What’s the difference?

While most people think of home equity loans when they hear the term second mortgage, HELOCs are also a type of second mortgage. The difference is that home equity loans offer a lump sum of cash, while HELOCs function differently, letting you draw from a pool of funds multiple times.

What is a second mortgage?

A second mortgage is a second loan that you take out against your home in addition to your original mortgage. Unlike refinancing your loan, which replaces your existing mortgage with a new one, a second mortgage leaves your original loan in place and adds a second loan (and monthly payment).

Usually, when people hear the term “second mortgage,” they think of a home equity loan. These loans offer a lump sum of cash up front, and you pay the balance back over a set period.

To get a second mortgage, you’ll need to have built some home equity. You can use this home equity calculator from Rocket Mortgage® to see how much you could get from a second mortgage.

What is a home equity line of credit (HELOC)?

A HELOC is another type of second mortgage, but it works quite differently from a home equity loan. Instead, a HELOC functions more like a credit card.

When you get approved for a HELOC, the lender will set a borrowing limit. You can then borrow from your HELOC multiple times, on an as-needed basis, until you reach that limit. Depending on your unique financial situation, the limit may be as much as 85% of your home’s equity. If you’re like the average homeowner who has $307,000 in equity, your HELOC borrowing limit would be $245,600.

HELOCs usually have two parts:

• Draw period. This is the initial part of the HELOC and lasts up to ten years. During this time, you can borrow money from the HELOC and usually only have to pay accruing interest each month.
• Repayment period. After the draw period ends, you enter repayment. You can no longer take money out of the HELOC and make full principal and interest payments.

Pros and cons of a HELOC

HELOCs can be a good fit for people who need flexible access to cash, but they’re not right for everyone. Consider a HELOC’s pros and cons before you apply.

Pros

Some reasons to consider a HELOC include:

• Borrow money as needed: If you’re looking to get projects started and you don’t know exactly how much you need, the line of credit aspect of this could be very attractive. You can take money out and pay back only the interest, or put the money back in so that it can be utilized many times during the draw period.
• Lower closing costs: HELOCs tend to have closing costs around 2% to 5% of the amount of the credit line. This can be lower than some other options you might have to access your home equity. Part of the reason for this may be that there are lower costs associated with a HELOC. As an example, a lender may rely on an existing appraisal.
• Flexible repayment period: Lenders offer draw and repayment periods of various lengths, so you may be able to more easily find an option that gives you the funding you need while fitting your budget.

Cons

HELOCs aren’t right for everyone, so keep these drawbacks in mind.

• Temptation to overspend: If you don’t have a specific budget in mind, having a line of credit might entice you to spend more than you originally intended.
• Risk of foreclosure: Because your house is used as collateral for a HELOC, the house is at risk of foreclosure if you default on the payments.
• Variable interest rates: Because a HELOC functions similarly to a credit card during the draw period, it has variable interest rates. These can change as often as every month, depending on what’s happening in the market.
• Possibility for payment shock: Because you go from being required to make only interest payments during the draw period to having to pay principal and interest during the repayment period, you must be prepared for your installments to go up quite a bit in the latter part of the term.

HELOC alternatives

HELOCs aren’t right for everyone. You may not have enough equity to get a loan of sufficient size, you could prefer a lump sum rather than a line of credit, or you may prefer not to put your home at risk.

If you decide that a HELOC isn’t right for you, you can consider these other options.

• Home equity loan: You’ll get all funds at once and can leverage your equity. If you think this may be the right choice for you, you can apply for a Home Equity Loan with Rocket Mortgage^®.
• Cash-out refinance: Cash-out refinancing lets you access your equity by replacing your original loan with a new one and receiving some equity as cash.
• Personal loan: You won’t have to leverage your home as collateral, but you’ll need good personal credit to qualify for a personal loan, as compared to a home equity loan.

The bottom line: HELOCs and home equity loans give homeowners access to equity

HELOCs and home equity loans are two options for homeowners who want to access their home equity. Home equity loans disperse funds in one lump sum. HELOCs offer the flexibility to draw money from your equity multiple times over the course of many years. Carefully consider your options before deciding if one of these is right for you.

Rocket Mortgage doesn’t offer HELOCs at this time.

If you’re thinking about applying for a home equity loan, you can start your application with Rocket Mortgage^® today.

 

Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. Not available in Texas. This is not a commitment to lend.