United States
Hong KongHELOCs and second liens
A HELOC is open-end revolving credit secured by the home, with a draw period followed by repayment. A home equity loan is closed-end with a lump sum. Both carry a right of rescission on a principal residence.
Two products often described interchangeably, and the difference is the same one that runs through consumer credit generally.
Open-end against closed-end
| HELOC | Home equity loan | |
|---|---|---|
| Type | Open-end revolving | Closed-end |
| Advance | Draw as needed up to a limit | One lump sum |
| Rate | Usually variable | Usually fixed |
| Repayment | Draw period then repayment period | Fixed schedule from the start |
A HELOC works like a credit card secured by the house. A home equity loan works like a second mortgage, which is what it is.
The draw and repayment periods
During the draw period a borrower may take funds and often pays interest only. When it ends, the repayment period begins and principal is added.
A borrower paying interest only for years can see the payment rise sharply when the repayment period starts. Explaining that at origination is part of the job, and questions describe borrowers who were not told.
Rescission applies
Both are secured by the principal dwelling and neither is purchase money, so the three-business-day right to cancel is available.
That catches candidates who associate rescission only with refinances.
Priority
A second lien sits behind the first, and in a foreclosure the first is paid before anything reaches it.
That is why second liens are priced higher, and why refinancing a first requires the second to subordinate.
Combined loan-to-value
Both liens count. A borrower comfortable at 70 percent on the first and drawing a line to 90 percent combined has a very different risk profile, and the CLTV is what shows it.
Common questions
What is the difference between a HELOC and a home equity loan?
A HELOC is open-end revolving credit with a draw period. A home equity loan is closed-end with a lump sum and a fixed schedule.
Does rescission apply to a HELOC?
Yes, where it is secured by the principal dwelling and is not purchase money.
What is a draw period?
The phase during which a borrower may take funds, often paying interest only, before the repayment period begins.
Why are second liens priced higher?
Because they sit behind the first in a foreclosure and carry more risk.
How does a second lien affect loan-to-value?
It counts in the combined loan-to-value, which can be far higher than the first-lien LTV alone.