Does a Home Equity Loan or HELOC Affect Your Mortgage?

A home equity loan or line of credit (HELOC) adds financial obligations to your monthly budget, with payments separate from your mortgage. If you use one of these financial products, you’ll make two payments: one on your mortgage and a second on the home equity loan or HELOC.

Since this financing can have a massive impact on your monthly obligations, it’s critical to understand how they work before getting one. We’ve researched home equity loans and HELOCs, including how they affect your overall housing costs.

Does a home equity loan or HELOC change your mortgage interest rate?

When homeowners consider tapping into their home equity through a home equity loan or a HELOC, a common question arises: does either option affect the interest rate of an existing mortgage? The straightforward answer is no. 

Getting a home equity loan or HELOC, often referred to as a “second mortgage,” does not alter the interest rate of your primary mortgage. These are distinct financial products, each with its own terms and rates.

• Mortgages are long-term installment loans used to finance a home, with the property serving as collateral. The interest rate on your mortgage is determined at the outset and remains fixed (with a fixed-rate mortgage) or adjustable (with an adjustable-rate mortgage) according to the terms of your agreement.
• Home equity loans give the borrower a lump sum of cash, using the home’s equity as collateral. The interest rate is usually fixed, and the terms of this loan are separate from those of your original mortgage.
• Home equity lines of credit (HELOCs) are simply lines of credit secured by your property’s equity. Unlike home equity loans, HELOCs typically have variable interest rates that can change over time.

It’s important to note that while these options do not affect your primary mortgage rate, they do add a separate layer of debt secured by your home. This means managing additional payments and terms without altering the original conditions of your first mortgage. 

Understanding the distinction and how each product works can help homeowners make well-informed decisions about using their home equity.

Does a home equity loan or HELOC increase your mortgage payment?

Home equity loans and HELOCs do not directly affect your mortgage payment. However, you’ll owe additional monthly payments for both of these products. While the payment on your first mortgage will remain unchanged, the overall amount you must pay each month on your home will increase.  

So, to reiterate the answer to this important question, while neither a home equity loan nor a HELOC directly affects your existing mortgage payment, they introduce additional payments, effectively increasing your total monthly financial obligations tied to your home.

Read on to further explore the answers to the following questions:

• Does a home equity loan affect your mortgage payment?
• How does a HELOC affect your mortgage payment?

Does a home equity loan affect your mortgage payment?

No, a home equity loan does not change your mortgage payment. However, it does add a separate loan with its own repayment terms. 

A home equity loan provides a lump sum borrowed against the equity you’ve built in your home. This loan usually has a fixed interest rate and a set repayment period, resulting in consistent monthly payments until the loan is paid off. 

You will have two payments: your original mortgage payment and the new home equity loan payment.

How home equity loan repayment works

A home equity loan’s repayment is straightforward. After receiving the lump sum, you start making fixed monthly payments covering both principal and interest. This payment does not change over the life of the loan, making budgeting easy. 

However, this means you must manage an additional financial commitment alongside your existing mortgage.

How does a HELOC affect your mortgage payment?

A HELOC itself does not change your mortgage payment. Like a home equity loan, a HELOC is a standalone financial product that provides access to funds up to a specific credit limit, using your home’s equity as collateral. You’ll make a separate monthly payment on the HELOC. 

This means you’ll have two monthly payments: one on your first mortgage and one on your HELOC. 

How HELOC repayment works

The two repayment phases of a HELOC are:

• Draw period: During the draw period of a HELOC (usually five to 10 years), you can borrow as much or as little as you want up to the credit limit. You’re often only required to make interest payments. Like a credit card, you won’t have any payments if you don’t have an outstanding balance. 
• Repayment period: Once the draw period ends, if you have an outstanding balance, your HELOC may enter a repayment period, often 10 to 25 years. Like a traditional mortgage, you’ll make monthly principal and interest payments for the remaining term.

Remember, a HELOC is usually a second mortgage (assuming you don’t own your home free and clear of any debt). So, the monthly payment you’ll make on a HELOC is in addition to the monthly payment on your first mortgage. These are both separate loans. 

HELOC repayment example

Let’s look at an example of how repayment on a HELOC works. In this example, we’ll assume you had a $40,000 outstanding balance on your HELOC during the draw period and the same balance when it transitioned to the repayment period.

We’ll also assume you locked in a fixed HELOC rate of 6% for the repayment term, which happened to be the same as the variable rate you were paying at the end of the draw period. During the repayment period, the principal portion of your payment is fully amortized over 10 years. 

	Draw period	Repayment period
Outstanding balance	$40,000	$40,000
Payment type	Interest-only	Principal and interest
Repayment amortization	N/A	10 years
Interest rate and type	6%, variable	6%, fixed
Monthly payment	$200	$444

As you can see in this example, even though your outstanding balance and interest rate didn’t change, your monthly payment on the HELOC more than doubled during the repayment period. This happened because you were required to start repaying the principal balance. 

Since the shift to the repayment period can significantly affect your monthly debt obligations, preparing yourself for this adjustment well before it occurs is crucial. If you’re unsure if you can make the payments during the repayment period, work out a plan before it becomes an issue. 

Keep in mind that your home secures your HELOC. So, if you don’t make the payments as agreed and default on the loan agreement, you risk losing your home to foreclosure.

Ask the expert

Eric Kirste

CFP®

If you’re having trouble making your HELOC or home equity loan payments, contact your lender immediately to try to renegotiate loan terms and repayment schedules. If you are unsuccessful and still need to alter the payment schedules, engage with your original mortgage lender as well as other mortgage lenders to look at possibly refinancing the mortgage by consolidating in the HELOC or home equity loan This will raise your original mortgage payment, but will hopefully provide a more manageable cash outflow.

How to determine whether you can afford a home equity loan or HELOC and your mortgage

When deciding whether home equity financing makes sense on top of your mortgage, take into account:

• Monthly payment: You’ll need to make a second payment for the HELOC or home equity loan or on top of the payment on your first mortgage. If you can’t comfortably make the payment, don’t sign up for one of these financial products. 
• Variable interest rates: Home equity loans are often fixed, but HELOCs could have variable rates, which can cause payments to change. Carefully consider how rate changes might affect your budget. 
• Annual fee: Certain HELOCs periodically charge a servicing or inactivity fee (e.g., each year). Before proceeding, carefully read your loan documents to ensure you understand what (if any) fees you’ll be charged. 
• Closing costs: Home equity loans and HELOCs may have associated costs, such as appraisal and lender fees. While these are one-time costs, make sure you consider them so you’re not surprised when it comes time to close the loan.

Additionally, consider which structure would be better for your financial needs: a home equity loan that gives you one-time funding or a HELOC that lets you draw funds multiple times. 

If your monthly budget is already tight, you may not be comfortable taking on extra debt, especially if you have several years of mortgage payments remaining. Remember, these financial products use your home as collateral. So, you risk losing your home if you don’t repay the agreed-upon obligation. 

A HELOC can be a big, tempting credit card if not handled properly. Have a defined plan for what the funds will be used for. Everyday expenses are not the ideal use of HELOC funds and instead should be part of a bigger financial strategy. 

Eric Kirste

CFP®

FAQ

Is a home equity loan or HELOC added to your mortgage?

No, a home equity loan or HELOC is not added to your mortgage. They are separate loans that use your home’s equity as collateral. While they don’t change your original mortgage, they are additional financial obligations with their own terms and repayment schedules that you’ll also need to repay.

Will a home equity loan or HELOC affect any other part of a mortgage besides the payment?

No. Regardless of getting a home equity loan or HELOC, your mortgage terms are locked in. The only way your terms change is if you refinance the loan. 

Will my mortgage and home equity loan or line of credit be two separate payments if I use the same lender?

Even if you use the same lender, your mortgage will always be a separate loan from any type of home equity financing. 

With a unique interest rate and repayment terms, your mortgage is considered the primary lien on the house over other types of debt that use the home as collateral.

Therefore, you’ll have two separate payments for your mortgage and home equity loan or HELOC, even if you use the same lender.

Can you refinance your mortgage if you have an open home equity loan or HELOC?

Eric Kirste

CFP®

You can, but you need to get the home equity lender to approve it and agree to refinance your first mortgage loan. In some instances, your HELOC lender can refuse to allow you to refinance your first mortgage loan. If your HELOC lender refuses to let you refinance, you may need to pay off the HELOC to refinance.