Second Mortgage Explained: HELOC vs HELOAN vs Piggyback [2026 Guide]
Understanding your options for tapping home equity
A second mortgage is any loan secured by your home that sits behind your primary mortgage. The three main types are: HELOC (revolving credit line), HELOAN (fixed lump sum), and piggyback loans (used at purchase). Second mortgages let you access equity without refinancing your first mortgage—important if you have a great rate you don't want to lose. Rates are higher than first mortgages because the second lender takes more risk.
What Is a Second Mortgage?
A second mortgage is a loan that uses your home as collateral, recorded after your primary (first) mortgage. The "second" refers to lien position—the order in which lenders get paid if the home is sold or foreclosed.
How Lien Position Works
If your home sells for $500,000:
1st Mortgage Balance: $350,000 → Paid first ✓
2nd Mortgage Balance: $80,000 → Paid second ✓
Remaining Equity: $70,000 → Goes to homeowner
If your home sells for $400,000:
1st Mortgage: $350,000 → Paid in full ✓
2nd Mortgage: Only $50,000 available → $30,000 loss for 2nd lender
This risk is why second mortgage rates are higher than first mortgage rates.
Types of Second Mortgages
1. HELOC (Home Equity Line of Credit)
A revolving credit line that works like a credit card, secured by your home.
- Structure: Credit limit you can draw from as needed
- Draw period: Typically 10 years to access funds
- Repayment period: Typically 10-20 years after draw period ends
- Rate type: Usually variable (tied to Prime rate)
- Payments: Interest-only during draw period (often), P&I during repayment
2. HELOAN (Home Equity Loan)
A fixed lump sum with fixed payments—a traditional second mortgage.
- Structure: One-time lump sum at closing
- Term: Typically 5-30 years
- Rate type: Fixed for life of loan
- Payments: Fixed monthly principal and interest
3. Piggyback Loan (80-10-10 or 80-15-5)
A second mortgage taken simultaneously with a first mortgage at home purchase to avoid PMI.
- Structure: 80% first mortgage + 10-15% second mortgage + 5-10% down payment
- Purpose: Avoid PMI and/or jumbo loan limits
- Rate type: Can be fixed or variable
- Common use: High-cost areas where 20% down is difficult
HELOC vs HELOAN: Complete Comparison
| Feature | HELOC | HELOAN |
|---|---|---|
| How you get funds | Draw as needed | Lump sum at closing |
| Interest rate | Variable (changes) | Fixed (never changes) |
| Monthly payment | Varies with rate and balance | Fixed for life of loan |
| Interest charged on | Only what you draw | Full amount from day one |
| Reusability | Can redraw (during draw period) | No—one-time disbursement |
| Closing costs | Often lower | Can be higher |
| Best for | Ongoing needs, uncertain amounts | Known amount, want rate certainty |
Second Mortgage vs Cash-Out Refinance
Both tap your equity, but in fundamentally different ways.
| Factor | Second Mortgage | Cash-Out Refinance |
|---|---|---|
| First mortgage | Stays the same | Replaced with new loan |
| Current low rate | Preserved | Lost |
| Number of payments | Two (first + second) | One |
| Closing costs | Lower (only on second) | Higher (on full amount) |
| Rate on new money | Higher (second lien) | Lower (first lien) |
| Best when | First mortgage rate is great | First mortgage rate is high |
The Rate Preservation Decision
If your first mortgage is at 3-4% and current rates are 6-7%, taking a second mortgage (even at 8-9%) may cost less than refinancing your entire balance at 6-7%.
Example: Need $100,000 from equity
Option A: Keep 3.5% first mortgage ($350K), add 8.5% HELOAN ($100K)
Blended rate: ~4.6%
Option B: Cash-out refinance entire $450K at 6.75%
Option A saves significantly—second mortgage wins!
When to Use a Second Mortgage
Best Scenarios for Second Mortgages
- Great first mortgage rate: Don't want to lose your 3-4% rate
- Smaller loan amounts: Cash-out refi closing costs don't justify
- Ongoing needs: HELOC for home improvements over time
- Emergency fund: HELOC as backup (don't draw unless needed)
- Avoiding PMI: Piggyback loan at purchase
When Cash-Out Refinance Is Better
- High first mortgage rate: Can lower your rate while getting cash
- Large amount needed: Lower rate on bigger balances matters more
- Prefer one payment: Simplicity of single monthly payment
- Rate environment: Current rates are lower than your first mortgage
Second Mortgage Requirements
Typical Qualification Standards
- Credit score: 660-680+ (higher than purchase requirements)
- Combined LTV: Maximum 80-90% (first + second combined)
- Debt-to-income: Typically 43% or less
- Equity: Usually need 15-20%+ equity minimum
- Property type: Primary residence preferred (investment properties harder)
CLTV Calculation
Combined Loan-to-Value (CLTV):
(First Mortgage + Second Mortgage) ÷ Home Value = CLTV
Example:
First Mortgage: $400,000
Second Mortgage: $80,000
Home Value: $600,000
CLTV: ($400K + $80K) ÷ $600K = 80% CLTV
Risks of Second Mortgages
Risk 1: Variable Rate Exposure (HELOC)
HELOC rates are typically variable. If rates rise significantly, your payment can increase substantially.
Risk 2: Payment Shock
When a HELOC's draw period ends, payments often increase dramatically as you begin repaying principal.
Risk 3: Home at Risk
Like your first mortgage, a second mortgage uses your home as collateral. Failure to pay can lead to foreclosure.
Risk 4: Reduced Equity
Tapping equity leaves less cushion if home values decline. In a downturn, you could owe more than your home is worth.
Risk 5: Two Payments to Manage
Having two mortgages means two payments, two servicers, and more complexity in your financial life.
Second Mortgage Interest Rates
Rate Factors
- Credit score: Higher score = lower rate
- CLTV ratio: More equity = lower rate
- Loan type: HELOAN typically slightly higher than HELOC
- Property type: Primary residence gets best rates
- Market conditions: Rates follow broader trends
Typical Rate Ranges
| Product | Typical Rate Range* | Rate Type |
|---|---|---|
| First Mortgage | 6-7% | Fixed |
| HELOC | 7-10% | Variable |
| HELOAN | 7.5-11% | Fixed |
| Piggyback | 7-10% | Fixed or Variable |
*Rates vary significantly based on credit, equity, and market conditions. For illustration only.
Tax Implications
Interest on a second mortgage may be tax deductible if:
- Funds are used to "buy, build, or substantially improve" the home
- Combined mortgage debt is under $750,000 ($375,000 married filing separately)
- You itemize deductions (don't take standard deduction)
Not deductible: Interest when funds are used for debt consolidation, tuition, vacations, or other non-home purposes.
Always consult a tax professional for your specific situation.
The Application Process
- Check your equity: Estimate your home value and calculate available equity
- Review your credit: Check your score and fix any errors
- Compare lenders: Get quotes from multiple sources
- Choose HELOC or HELOAN: Based on your needs and preferences
- Apply: Submit application with income and asset documentation
- Appraisal: Lender orders appraisal to verify home value
- Underwriting: Lender reviews and approves
- Closing: Sign documents and access funds
Getting Started
A second mortgage can be an excellent tool for accessing equity while preserving a great first mortgage rate. The key is understanding the trade-offs between HELOC flexibility, HELOAN stability, and the alternative of cash-out refinancing.
Related Resources
Mo Abdel | NMLS #1426884 | Lumin Lending, Inc. | NMLS #2716106 | DRE #02291443
Licensed in: CA, WA
Equal Housing Lender. All loans subject to credit approval. Rates shown are for illustration only and may not reflect current market conditions. Tax information is for educational purposes—consult a tax advisor for your situation.