When homeowners hold a 3% first mortgage, doing a full cash-out refinance at 6.5% destroys favorable rate leverage. A junior lien (HELOC or Fixed Home Equity Loan) taps equity while preserving the low first mortgage rate.
1. HELOC vs. Home Equity Loan Compared
| Feature | Home Equity Line of Credit (HELOC) | Fixed-Rate Home Equity Loan (2nd Mortgage) |
|---|---|---|
| Interest Rate Structure | Variable (Wall Street Journal Prime Rate ± Margin) | Fixed for the entire 10 to 20-year term |
| Disbursement Mechanism | Revolving credit line (draw and repay as needed) | Lump-sum cash disbursement at closing |
| Repayment Phase | 10-Year interest-only draw → 20-year amortizing reset | Immediate fully amortizing fixed monthly payments |
| IRS Tax Deductibility | Deductible ONLY if used to substantially improve the home | Deductible ONLY if used to substantially improve the home |