Refinance vs HELOC vs Second Mortgage: Which Is Right for You?

Need extra funds or better terms on your home loan? If yes, you should know about refinance vs HELOC vs second mortgage. Refinance has lower rates; HELOC offers ongoing access; and second mortgage provides a large lump sum without touching the first mortgage. But which is best for you?

In today’s blog, we break down these three (along with their pros and cons) so you can choose what works best for you.

What Is a Mortgage Refinance?

Mortgage refinancing options allow you, the homeowner, to replace your existing mortgage with a new one to get better terms (amortization, cash-out, or mortgage interest deduction). The new loan pays off the old mortgage, and you’ll repay under the new agreement.

• How Refinancing Works: After applying, the lender re-evaluates your income, credit, and debt ratios. The property is appraised, and you can borrow up to 80% of its current value. The new funds pay off your old mortgage, minus the appraisal, legal fees, and prepayment penalties.
• When It’s Beneficial: When interest rates drop, your credit score/income improves, or you want to access home equity for renovations, investments, or debt consolidation. It’s also a smart move to switch between fixed-variable rates or amortization for budget flexibility.
• Who Should Consider It: Homeowners with at least 20% equity, those who are approaching the end of their term (to minimize penalties), or have high-interest debts that can save by rolling them into a lower-rate mortgage.

For expert advice on timing and strategies, check out our mortgage renewal tips guide.

What Is a HELOC (Home Equity Line of Credit)?

A home equity line of credit (HELOC) allows you to borrow against your home’s equity with access to funds. According to Canada.ca, you can borrow up to 65% of the property value with a HELOC (minus your mortgage).

• It works like a revolving line of credit that lets you borrow, repay, and borrow again up to your limit. During the draw period, you can make interest-only payments. Rates are variable and usually lower than unsecured loans, too (since it’s secured by your home).
• Unlike traditional loans, HELOC gives you on-demand access to funds instead of a lump sum with flexible payments. Its rates are variable as well, while traditional home equity loans are often fixed.

What Is a Second Mortgage?

A second mortgage is an additional loan secured against your home, which is already mortgaged. It lets you borrow against the equity built up in your home without refinancing the original mortgage.

It’s called "second" because it is subordinate to the first mortgage. So, in case of default, the first mortgage lender is paid before the second. Common uses of second mortgages include:

• Consolidating debts
• Financing home renovations
• Covering education expenses
• Investing in real estate or other ventures
• Handling emergency expenses

For a comprehensive overview of home financing options, explore our guide on “What Is a Mortgage?”

Refinance vs HELOC vs Second Mortgage: Key Differences

When considering how to access your home equity, it's essential to understand the distinctions between refinance vs HELOC vs second mortgage. Let’s have a quick comparison.

- Interest Rates: Refinancing often provides lower rates, especially if you have improved credit. HELOC offers variable rates, perfect when rates are low, but may increase over time. Second mortgages usually come with higher rates due to their subordinate position.

- Repayment Methods: Refinancing combines your debt into structured payments, while HELOC has versatile borrowing and interest-only options. Considering refinance vs second mortgage, refinancing simplifies the repayment, but second mortgages add another loan to manage.

- Risks: Refinancing can have penalties if you break your term early. HELOCs come with the risk of rising interest rates and potential overspending. Second mortgages also increase overall debt and may lead to foreclosure if there are missed payments.

- Benefits: Mortgage refinancing options lower monthly payments and consolidate debt; HELOCs provide access to funds as needed; and second mortgages present lump sum access without altering your primary terms.

Which Option Is Best for You?

Now that the differences between refinance vs second mortgage vs HELOC are clear, let’s see which is better for you. To answer, you need to consider these factors:

• Home Equity: If you have high equity (≥20%), a second mortgage or HELOC gives you access to cash without replacing the first mortgage. Say, you own $500,000 home with $300,000 paid off; you could take a HELOC for renovations.
• Interest Rates: If current rates are lower than the original mortgage rate, refinancing could reduce monthly payments and interest costs. For example, if your 5-year fixed mortgage is 5%, but current rates are 3.5%, refinancing will save you money over time.
• Financial Goals: If you’re looking for flexibility or short-term access, go for HELOC. This way, you’ll be able to (hypothetically) fund renovations over several months instead of taking a lump sum. For long-term savings, refinancing is ideal to consolidate high-interest debts.
• Loan Purpose: Second mortgage suits lump-sum needs better, whereas recurring expenses or emergencies mostly call for HELOC. Example: You can consolidate $20,000 in credit card debt with a second mortgage or refinance, depending on rates and terms.

Benefits and Drawbacks of Each Option

FAQ

Which option has the lowest interest rate?

Between the three, refinance has the lowest interest rate on average, because you’re essentially replacing the existing mortgage with a new one.

Is HELOC better than refinancing?

Given the differences between refinance vs HELOC, HELOC allows drawing funds over time (short-term or variable cash needs), and refinancing is favored for large, one-time expenses or debt consolidation.

Can I have a HELOC and a second mortgage at the same time?

Yes, although it’s not easy to qualify for both simultaneously (especially from different lenders). You’ll need to meet the lender's/lenders’ requirements and have sufficient equity in your home.

How do I know which option suits my situation?

It depends on your cash needs, repayment ability, and risk tolerance. To choose better, think about whether you need convenient access to funds or a one-time lump sum. Also, consider how comfortable you are with variable rates or predictable, fixed payments.

Final Thoughts: Choose the Right Home Financing Option

When it comes to home financing options, what works for one person might not suit another. So, take some time to research, evaluate your options, and consult with a mortgage expert to find the most efficient solution for your finances.