Choosing the Right Option: Home Equity Line of Credit, Refinance, or Second Mortgage?


One thing true about home equity is that it increases over time. Therefore mortgage brokers all over the world advise to utilize this increase in home equity. It can be done in mainly three ways: Home Equity Line Of Credit (HELOC), Refinance Mortgage, and taking out a Second Mortgage on your home. The funds accessed can be used for debt payment or toward a larger personal expense. It’s imperative to know about these 3 options in detail and choose as per your requirements. 

Let’s see what these variants amount to:

(1) Home Equity Line Of Credit (HELOC)

HELOC is a secured form of credit. You’re basically borrowing money from the lender keeping your home as collateral. Home Equity Line Of Credits are revolving credits where the cycle of borrowing and paying back continues till you reach the maximum credit limit. 

The max credit limit for HELOC is fixed at 65% of home equity. It’s less than the refinance mortgage limit of 80% but it comes with added advantages. Unlike traditional mortgage products, there is no need for fixed monthly repayments. You’re just required to pay interest on the amount borrowed. You can choose the minimum monthly payments to pay off the debt. In HELOC, you can pay in small increments over a long period of time or large payments over a short period of time. There are no prepayment penalties as in mortgages. It’s like you’re using a credit card for bigger credit lines. 

Testing HELOC Eligibility: If you want to take out a standalone HELOC, you’ll be required to provide:

  1. A down payment/equity of 20% (35% if you’re substituting traditional mortgage with standalone HELOC).
  2. An acceptable credit score.
  3. Proof of stable income.
  4. Details of pre existing debt.
  5. Eligibility for passing the ‘stress test’ (mandatory by banks but may not be necessitated by non banking lenders). Benchmark interest rate for stress test is 5.25% or the lender interest rate plus 2%, whichever is higher.
  6. Proof of being the homeowner (if accessing home equity).
  7. Your current mortgage details including interest rate, monthly repayments and mortgage term.
  8. Current home appraisal if you’re using home equity.

Needless to say that HELOC offers more flexibility in terms of monthly repayment amount, prepayment, and loan term as compared to refinance mortgage. If the 65% home equity fulfills your current financial goals, you can go for HELOC without any doubt.

(2) Refinance Mortgage

Refinance mortgage means taking out a new mortgage to pay off the original mortgage. The previous mortgage gets REPLACED by a new mortgage and all payments shift toward the new loan. 

People choose to refinance to access increased home equity through cash-out refinance mortgages. You can also exploit the options of lower interest rates than your current mortgage and switch from a fixed rate/term to a variable rate/term mortgage. Refinancing allows you to access 80% of your home equity. If you’re using the cash-out option, you can use the excess funds for debt consolidation. 

Refinance Mortgage Eligibility: There are certain parameters that determine your eligibility for refinancing:

  • Loan To Value Ratio: The LTV ratio or a loan-to-value ratio determines if the home you’re purchasing costs higher than the loan amount. For this purpose, the loan amount is divided by the value of the asset. An LTV ratio lower than 80% is preferred for refinance mortgages.
  • Total Debt Service Ratio: The TDS ratio or Total Debt Service Ratio determines whether your monthly income is enough or not to absorb additional mortgage payments without offsetting other debt payments. A TDS Ratio of less than or equal to 40% is acceptable for refinance. 
  • Good Credit Score: Most banks require a credit score of 650 or higher for refinancing. Non-banking lenders may be flexible with their credit score requirements. 
  • Refinancing is not free from the traditional mortgage costs such as prepayment penalties, lender costs, discharge fees (when you switch lenders), legal fee (if any) and home appraisal fee.

(3) Second Mortgage

Second mortgage may seem like adding another mortgage to your existing one but its slightly different. Second mortgage refers to taking out a Home Equity Loan while you’re in the middle of your existing mortgage amortization. Because your current mortgage is not yet paid completely, any loan on your home equity falls under the second mortgage option. It’s not necessary to approach your existing lender for home equity loan. You can choose a different lender for the same to secure better rates and terms. 

The interest rates for second mortgages are usually higher than the current mortgage. It’s because the lender considers you a high-risk applicant owing to your existing loan. All the terms of prepayment penalties, fixed monthly repayments etc. are applicable on home equity loans as well. 

You can access home equity loans once you’ve built up 20% of home equity. It allows you to access 80% of your home equity with a payment term of ten years or less.  Applicants will be required to get a home appraisal done to determine the current home equity.


As we’ve already discussed the various attributes of the three ways to access a home equity, you can choose as per your requirement. A lot depends upon the latest interest rate trend, your equity need, your repayment capabilities, and the preferred loan term. Talk to your mortgage brokers to know which one of the three: Home Equity Line Of Credit (HELOC), Refinance Mortgage, or a Second Mortgage, works best for you.

Scroll to Top