Financial decision
One rewrites the loan you already have. The other leaves it untouched and stacks a second, fixed loan behind it.
A home equity loan is sometimes called a second mortgage, and that is exactly what it is: a separate fixed-rate loan on top of the mortgage you already carry. Understanding when to add a lien instead of replacing one is the difference between keeping a good rate and losing it.
At a glance
A new first mortgage that pays off the old one. You reset the rate, the term, and the amortization schedule on the entire balance.
A fixed-rate lump-sum loan secured by a second lien. Your first mortgage keeps its rate, term, and payment; the new loan has its own.
| Factor | Refinance | Home Equity Loan |
|---|---|---|
| Effect on existing rate | Replaced | Preserved |
| Rate charged | First-mortgage pricing | Higher — second-lien pricing |
| Closing costs | Full mortgage costs | Lower, sometimes lender-paid |
| Payout | Lump sum at closing (cash-out) | Lump sum at closing |
| Payments after closing | One | Two |
| Term flexibility | 10–30 years | 5–20 years |
A second lien costs more per dollar borrowed — and can still be far cheaper than repricing your entire mortgage.
Plain English first, then the rule as it is published, then what it means for your file.
“The CLTV ratio is the sum of the original loan amount of the first mortgage plus the full amount of any subordinate financing, divided by the lesser of the sales price or appraised value.”
Your first mortgage and your home equity loan are measured together. Most lenders stop at 80%–85% combined, so a large first mortgage leaves little room for a second.
Today's rate is at or below your current rate, you want one payment, or you also want to change the term — for example moving from 30 years to 15.
Your existing rate is well below the market, you need a defined lump sum, and you would rather pay a higher rate on a small balance than a market rate on the whole mortgage.
Compare total dollars of interest, not headline rates. A 9% second on $50,000 frequently beats a 7% first on $400,000 when your current mortgage is at 3.5%.
No. A home equity loan is a fixed-rate lump sum with a set payment. A HELOC is a revolving line, usually variable, that you draw against as needed.
Often a lender will accept an automated valuation or a drive-by, which is one reason the closing costs are lower.
It must either be paid off or subordinated. Subordination is common but requires the second-lien holder's written approval.
Every rule stated on this page is traceable to the agency handbook that governs it. Guidelines change — confirm anything time-sensitive with a licensed loan officer before acting on it.
Reviewed by Brian Mix, licensed loan officer (NMLS #111175) · Last checked July 2026.
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