Second Mortgage vs HELOC on an Investment Property

A second mortgage on a rental is a loan secured by the property behind your existing first mortgage. It comes in two shapes: a closed-end second that pays out once, and a HELOC that works like a revolving line. Both borrow against equity and leave the first mortgage in place. They behave differently after closing.

What is a closed-end second mortgage?

A closed-end second (sometimes called a HELOAN) is one loan with a fixed amount. You receive the full amount at closing and repay it on a set schedule. There is no line to draw on afterward.

USA Mortgage offers the closed-end second. See the second mortgage program for typical terms, subject to underwriting. How a second mortgage on a rental works covers the basics, and a second behind a DSCR or conventional first covers the first lender's side.

What is a HELOC on an investment property?

A HELOC is a line of credit secured by the property. You draw what you need, when you need it, up to a limit. USA Mortgage offers a line of credit on a rental, at a fixed rate, in the same second mortgage program as the lump-sum second. Some banks write HELOCs only against a home you live in, so ask any other lender before you plan around one.

How do they compare?

• Funding — a closed-end second pays the full amount at closing. A HELOC lets you draw in pieces.
• Planning — a closed-end second fits a known cost, like a rehab budget or a down payment. A HELOC fits spending you cannot size yet.
• Repayment — a closed-end second has a fixed term and amortizes. A HELOC has its own draw and repayment rules, so read them before you sign.
• Rate and prepayment — on our program both structures carry a fixed rate. Prepayment penalty: 0 to 5 years.
• Use of funds — our program is business purpose only, on property you do not live in. See the business-purpose section of the main guide for the federal test.

If you know the number, a closed-end loan is simpler. If you do not, a line gives you room, at the cost of more moving parts.

How much can you borrow?

Both products size the same way. Take the property value, multiply by the maximum combined loan-to-value (CLTV), and subtract what you owe on the first. CLTV counts every lien on the property, including the new one. See CLTV explained. Fannie Mae's Selling Guide says the lender must consider all subordinate liens when it calculates CLTV (B2-1.2-04).

An illustration, not a quote: a rental worth $400,000 at an 80% CLTV cap supports $400,000 x 80% = $320,000 in total debt. With a $180,000 first mortgage, that leaves $320,000 - $180,000 = $140,000 for the second. With a $290,000 first, it leaves $320,000 - $290,000 = $30,000, which is below a $50,000 minimum loan size.

Run your own numbers in the second mortgage calculator.

Second mortgage or cash-out refinance?

A cash-out refinance replaces the first mortgage with a larger loan (the full comparison works the blended cost). A second leaves the first alone, which matters when your first has terms you want to keep or a prepayment penalty. The guide on lien position covers why a second sits behind the first.

Typical USA Mortgage terms

Typical terms, subject to underwriting, for a lump-sum second or a line of credit: loan amounts from $50,000 to $1,000,000, a fixed rate from 6.99%, first or second lien, 660 minimum FICO, up to 80% CLTV on investment properties, minimum 1.00 DSCR, and a 3-4 week close. Every loan is conditional on the borrower and the property. Business purpose only, on 1 to 4 unit non-owner-occupied investment property. Not a commitment to lend.