When homeowners need to borrow significant funds for big expenses, they often turn to second mortgages. However, they may not realize that there are two major types of second mortgages: HELOCs and home equity loans (sometimes identified as HELOANs).
While both essentially operate on the same idea of borrowing against your home’s value, they function differently and serve distinct financial needs.
What's in this article?
Whether funding a significant home improvement, consolidating debt or covering unexpected expenses, understanding how HELOCs and home equity loans can work for you is key to making the right choice.
What are the two types of second mortgages?
As a homeowner, a second mortgage allows you to borrow against your home’s equity while keeping your primary mortgage in place.
There are two main types:
HELOAN (Home Equity Loan)
- This loan provides a lump sum up front with a fixed interest rate and predictable monthly payments.
- A flexible option for covering large expenses, including education costs, home improvements or unexpected medical bills.
HELOC (Home Equity Line of Credit)
- A HELOC is a revolving credit line with a variable interest rate and flexible withdrawals.
- These are best for ongoing expenses or projects with unpredictable costs.
Both options use your home as collateral but differ in structure, flexibility and repayment terms.
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Key differences between HELOCs and HELOANs
Recognizing the differences between these two options can help you decide which is best suited for your financial situation.
| Feature | HELOC | HELOAN |
| Funds disbursement | Borrow as needed up to a set limit | Lump sum disbursed up front. |
| Interest rate | Variable (fluctuates with market rates) | Fixed (consistent over loan term) |
| Repayment structure | Interest-only during the draw period, then principal + interest | Fixed monthly payments (principal and interest) |
| Best for | Ongoing expenses, home renovations, flexible borrowing | One-time expenses, predictable costs, fixed budgeting |
Let’s break these down further.
Funds disbursement
- HELOANs provide a single, one-time lump sum, making them ideal for major up-front expenses like home remodels or debt repayment.
- HELOCs act as revolving credit lines, allowing you to borrow as needed over a set period. They are perfect for projects with variable costs.
Interest rates
- HELOANs provide borrowers with fixed interest rates, translating into consistent monthly payments throughout the loan term.
- HELOCs come with variable interest rates, which fluctuate with the market, meaning payments may change over time.
Repayment terms
- A HELOAN requires fixed monthly payments that cover both principal and interest over a set loan term (typically 5-30 years).
- A HELOC has a draw period (usually 5-10 years) during which you can borrow and make interest-only payments. Then, there is a repayment period during which you must repay the principal plus interest.
Pros and cons of HELOCs
Multiple home equity offerings are available for a reason: Different borrowers have different needs.
HELOC Pros
- Flexibility: Allows you to borrow what you need when you need it.
- Lower initial rates: Variable rates often start lower than fixed loan rates.
- Reusable credit: As you repay, your credit line replenishes, allowing you to borrow again.
HELOC Cons
- Variable rates: Payments can increase if interest rates rise.
- Unpredictability: Fluctuating payments can make budgeting challenging.
- Risk of overspending: Easy access to funds could be tempting for some borrowers and lead to the accumulation of additional debt.
Best for: Homeowners who need flexibility for continuing or unpredictable expenses, such as home improvements or tuition payments.
Pros and cons of HELOANs
Home equity loans have their place among borrowers who need a lump sum of funds.
Pros
- Predictability: Fixed interest rates and monthly payments make budgeting easier.
- Lump sum funding: Ideal for large, one-time expenses like renovations or weddings.
- Long-term stability: Your rate will not change, even if market rates rise.
Cons
- Higher initial rates: Fixed rates often start higher than HELOC rates.
- Less flexibility: You cannot borrow additional funds once the loan is disbursed.
- Potential overborrowing: Taking out a lump sum may lead to unnecessary spending.
Best for: Homeowners who prefer stability and have a clear, one-time financial need.
Which equity option is better for you?
Choosing between a HELOC and a home equity loan will depend on your personal situation, including your financial goals, risk tolerance and borrowing needs.
Choose a HELOC if:
- You need flexibility for ongoing expenses.
- Your financial situation can comfortably handle variable interest rates and fluctuating payments.
- You want to borrow only what you need when you need it.
Choose a HELOAN if:
- You have a specific, one-time expense in mind.
- You prefer fixed monthly payments and a predictable interest rate.
- You want to lock in a rate for the long term.
No two borrowers experience the same situation!
That’s why it’s important to speak with a financial advisor or a trusted lender like Compass Mortgage to find the best option for you.
How Compass Mortgage can help
Compass Mortgage specializes in helping homeowners confidently navigate second mortgage options.
Whether you’re considering a HELOC or a HELOAN, our team provides personalized guidance throughout the process.
Why choose Compass Mortgage?
- Expert advice: We explain the pros and cons of each option to help you make an informed decision.
- Competitive rates: Compass Mortgage offers some of the most competitive HELOC and HELOAN rates in the industry.
- Personalized service: Our team tailors solutions to fit your unique financial goals.
- Streamlined process: From completing your application to mortgage approval, we make the process simple and stress-free.
With Compass Mortgage, you can borrow against your home’s equity with confidence and clarity.
Which type of equity loan works best for you?
Both HELOCs and HELOANs offer unique advantages.
The right choice depends on your financial situation, borrowing needs and repayment preferences:
- A HELOC provides flexibility and the ability to borrow as needed over time.
- A HELOAN offers stability with fixed payments and a clear repayment structure.
Choosing between a HELOC and a home equity loan ensures that you leverage your home’s value wisely.
Making a well-informed decision today can provide financial security and peace of mind for the future.
Ready to explore your HELOC and HELOAN options?
Contact Compass Mortgage today to learn more about HELOCs and HELOANs and how we can help you use your home’s equity wisely.
Access your home equity from a HELOC or HELOAN from Compass Mortgage today.