It’s a common question, what’s the difference between a HELOC vs a second mortgage? The short answer is, not a whole lot aside from verbiage.
A second mortgage is another loan taken against your property that’s already mortgaged. You’ll be borrowing again, not to buy a home this time, but against your home by using the equity you’ve built up by making your mortgage payments and/or that’s accumulated passively due to a potential increase in property value.
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Mortgage vs Second Mortgage
Before we go further into the differences between a HELOC vs a second mortgage, let’s examine how a first mortgage is similar and potentially unlike a second. Your first mortgage allowed you to borrow a large amount of money, in a single lump sum, to buy a home. In doing so, the lender will have placed a lien on your home which would allow them to seize the property should you not make your mortgage payments and/or default on that first mortgage.
A second mortgage is akin to the first in that once again a lien will be placed on your home but this time, only on the portion of your home that you’ve paid off and will borrow against — the equity you’ve built up that you’ll use as collateral for the second mortgage loan
With a second mortgage, you’re not borrowing to buy your home but instead, borrowing against the equity you have built up in your home. As with your original mortgage, the home will serve as collateral for the loan. It’s likely that multiple lenders will have liens against your home, one for the balance still owed on the first mortgage and another for the amount of home equity you have borrowed.
Why Consider A Second Mortgage?
A second mortgage provides you, the homeowner, with an influx of cash, for whatever purpose(s) that cash is needed. Maybe you want to consolidate credit card debt, pay off student loans or find the best way to finance home improvements. With a second mortgage, you may be able to access funds by borrowing against your home and using the equity you have accumulated in it.
The Difference Between a HELOC vs Second Mortgage
Now that you know how a second mortgage will differ from your first, and what you could do with the funds from it, let’s now take a look at the key differences when it comes to a HELOC vs a second mortgage.
The difference, essentially, is the language because your second mortgage will be processed as either a home equity loan or line of credit (HELOC). These are the two loan vehicles that can fund a second mortgage, and within the two there are differences.
Whereas a home equity loan will likely act similarly to your first mortgage, with a fixed monthly loan payment over a fixed number of years, taking a HELOC as your second mortgage offers the same kind of access to your home’s equity but with the added flexibility of making repayments only on the amount withdrawn from the line of credit. A HELOC also allows for continuous borrowing, as the amount accessible through the line of credit increases with each principal payment amount made.
The differences between a HELOC vs a second mortgage may have been confusing but now you understand how the former can fund the latter. Find out more about how a HELOC works and how Prosper may help you access your home equity as a second mortgage.
Eligibility for a home equity loan or HELOC up to the maximum amount shown depends on the information provided in the home equity application. Depending on the lender, loans above $250,000 may require an in-home appraisal and title insurance. Depending on the lender, HELOC borrowers must take an initial draw of the greater of $50,000 or 50% of the total line amount at closing, except in Texas, where the minimum initial draw at closing is $60,000; subsequent HELOC draws are prohibited during the first 90 days following closing; after the first 90 days following closing, subsequent HELOC draws must be $1,000, or more, except in Texas, where the minimum subsequent draw amount is $4,000.
The amount of time it takes to get funds varies. It is measured from the time the lender receives all documents requested from the applicant and depends on the time it takes to verify information provided in the application. The time period calculation to get funds is based on the first 4 months of 2023 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period.
For Texas home equity products through Prosper, funds cannot be used to pay (in part or in full) non-homestead debt at account opening.
Depending on the lender, qualified home equity applicants may borrow up to 80% – 95% of their primary home’s value and up to 80% – 90% of the value of a second home. In Texas, qualified applicants may borrow up to 80% of their home’s value. HELoan applicants may borrow up to 85% of the value of an investment property (not available for HELOCs).
Home equity products through Prosper may not be available in all states.
All home equity products are underwritten and issued by Prosper’s Lending Partners. Please see your agreement for details.
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