What is a second mortgage and a HELOC?
A second mortgage, junior-lien, or HELOC is a type of loan you take out using your house as collateral while you still have another loan secured by your house. Home equity loans and home equity lines of credit (HELOC) are common examples of a second mortgage.
Some second mortgages are “open-end” (meaning you can continue to take cash out up to the maximum credit amount and, as you pay down the balance, can draw again up to the same limit) and other second mortgage loans are “closed-end” (in which you receive the entire loan amount upfront and cannot redraw after that).
The term “second” means that if you can no longer pay your mortgage and your home is sold to pay off the debts, this loan is paid off second. If there is not enough equity to pay off both loans completely, your second mortgage loan lender may not get the full amount it is owed. As a result, second mortgage loans often carry higher interest rates than first mortgage loans.
Tip: Be careful using home equity to consolidate higher interest debts. When you use home equity to pay off other debts you really aren’t paying them off. You are merely taking out one loan to repay another. The interest rates may be lower in the short term, but that’s only because you are using your home as collateral.
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More Information on a second mortgage and a HELOC
Consumer Financial Protection Bureau
What is a second mortgage loan or “junior-lien”?
Consumer Financial Protection Bureau
My lender offered me a home equity line of credit (HELOC). What is a HELOC?