Are Home Equity Loan Rates Higher Than Mortgage Rates? | Rate Gap Notes

Home equity loan rates often run higher than first mortgage rates because the loan sits behind your main mortgage in the repayment line.

If you’re weighing a cash-out refinance, a new mortgage, or a home equity loan, the pricing can feel inconsistent. That’s normal. These products sit in different risk buckets, and lenders price that risk into the interest rate.

This article explains what usually pushes home equity loan rates above mortgage rates, when the gap can shrink, and how to compare offers without getting tripped up by fine print.

What A Home Equity Loan And A Mortgage Really Are

A mortgage used to buy or refinance a home is usually the “first lien” loan. It has the first claim on the property if the borrower stops paying. That position lowers lender risk, so pricing can be lower.

A home equity loan is a second loan tied to the same property. In most cases, it becomes a “second lien.” If a foreclosure sale can’t cover every debt, the first lien gets paid first. A second lien lender may collect less, or nothing at all, which raises the lender’s risk.

The Consumer Financial Protection Bureau explains the basics of second-lien borrowing, including where costs can show up. Their plain-language page on what a home equity loan is helps clarify what you’re actually signing up for.

Home Equity Loan Rates Versus Mortgage Rates: What Drives The Gap

Most of the time, home equity loan rates land higher than mortgage rates. The reason is not a trick. It’s mainly about position, loss risk, and how a lender funds and hedges the loan.

Lien position changes the loss math

When home prices fall, the cushion that protects a lender can shrink fast. A first lien mortgage still has the front spot. A second lien loan absorbs more of the downside. Lenders price that added exposure into the rate.

Loan-to-value and combined loan-to-value shape pricing

Mortgage pricing leans heavily on LTV, the loan amount divided by the home’s value. For second liens, lenders often look at CLTV: the first mortgage balance plus the new home equity loan, divided by the home’s value.

Say your home is worth €400,000 and you owe €280,000 on your mortgage. Your LTV is 70%. If you add a €40,000 home equity loan, your CLTV becomes 80%. That higher CLTV can push the rate up, even if your credit score looks strong.

Second liens can be harder to sell

Many first mortgages fit standard agency boxes and can be sold into large secondary markets. That can lower funding cost for the lender. Second liens may have fewer exit routes, so the lender may hold the risk longer. Higher holding risk can show up as a higher rate.

Fixed-rate second liens carry rate risk for longer

With a fixed-rate home equity loan, the lender locks in a rate while its own funding costs can move. Lenders hedge this, but hedging costs money. Some lenders price that cost into the rate, especially on longer terms.

Smaller balances can raise the effective cost

A €20,000 second lien still needs underwriting, valuation work, closing documents, and servicing. Those costs don’t shrink much just because the balance is smaller. Lenders can cover them with fees, a higher rate, or both.

Credit score hits second liens a bit differently

Credit score affects both products, but pricing steps can be steeper for second liens. The lender sees less collateral buffer, so borrower risk weighs more in the quote.

When Home Equity Loan Rates Can Match Or Beat Mortgage Rates

It happens, but it’s not the common case. Here are situations where the spread can shrink.

Your first mortgage is older and high-rate

If your current mortgage was taken out when market rates were higher, today’s first mortgage rates might be lower than what you pay now. A home equity loan rate could still be higher than today’s mortgage rates, yet lower than your existing mortgage rate. That can feel like “home equity is cheaper,” but it’s really a time-stamp effect.

You’re comparing against a riskier mortgage type

Not all mortgages are priced the same. Cash-out refinances, investor loans, and some low-down-payment programs can price higher than a plain rate-and-term refinance. In those cases, a strong-borrower home equity loan can land close to a mortgage quote.

Short terms can narrow the spread

A five-year home equity loan may price closer to a 30-year mortgage than a longer-term second lien would. Lenders take less long-term rate risk on shorter terms.

Promotional bank pricing in limited windows

Some banks price second liens aggressively to win relationships. They may expect to earn from deposit accounts, cards, or future borrowing. That sort of deal can narrow the gap, even if it isn’t offered widely.

How To Compare Offers Without Getting Fooled

Rate is only part of the story. What you pay over time depends on fees, term length, and how you plan to use the money.

Compare APR, not just the note rate

The APR folds in certain fees and gives a cleaner apples-to-apples number across lenders. Ask each lender for a written Loan Estimate or a similar disclosure that lists the APR and itemized costs.

Check whether you’re seeing best-case pricing

Some rate quotes assume auto-pay, a large draw amount, or a top-tier credit score. Ask what exact score band and CLTV band the quote uses. Then ask what happens if the valuation comes in lower than expected.

Look at prepayment rules

Many home equity loans have no prepayment penalty. Some do, especially for promotional offers. If you plan to pay it off early, that clause can flip the math.

Ask about closing costs and valuation method

Second liens often use desktop valuations or automated models. That can cut cost, but it can also create surprises if the model values your home lower than you expect. Get clarity on the valuation method and any fees tied to it.

Use cash-out refinance as a benchmark

A cash-out refinance replaces your first mortgage and folds extra cash into the new loan. That can bring a lower rate than a second lien, but it also resets your mortgage clock and can raise total interest paid over time.

To sanity-check the market level of first mortgage rates, many people reference the Freddie Mac Primary Mortgage Market Survey. You can view the weekly survey data on Freddie Mac’s PMMS page.

Rate And Feature Snapshot For Common Options

The table below compresses the trade-offs people run into when choosing between a first mortgage and a second lien. Terms and pricing vary by lender and country, but the structure holds.

Option	What It’s Used For	Rate Pattern You’ll Often See
Purchase mortgage (first lien)	Buying a home	Often the lowest, since it’s first lien
Rate-and-term refinance	Lowering rate or changing term	Near purchase mortgage levels when profile fits
Cash-out refinance	Borrowing extra funds on first lien	Often higher than rate-and-term refi
Home equity loan (second lien)	One-time lump sum	Often higher than first mortgage rates
HELOC (second lien, variable)	Flex draw over a period	Can start lower, then moves with indexes
Personal loan (unsecured)	No collateral, faster funding	Often higher than secured options
Credit card (revolving)	Short-term spending	Often the highest, offset only by rewards
Construction loan	Building or major renovation	Can be higher due to project risk

What Lenders Check Before Setting Your Rate

Lenders aren’t just pricing a product. They price your file. Knowing what they look at helps you tighten your application before you shop.

Credit score and recent credit behavior

Beyond the score number, lenders watch late payments, high card utilization, and recent new accounts. If you plan to apply soon, keeping card balances low and avoiding new credit can steady your quote.

Debt-to-income ratio

DTI compares your monthly debt payments to your gross monthly income. A higher DTI can push the offered rate up or shrink the amount you can borrow.

Property type and occupancy

Owner-occupied homes often price better than rentals. Condos, multi-unit properties, and non-standard homes can add underwriting friction that shows up as a higher rate.

Documentation strength

Stable income, clear tax records, and clean bank statements can keep the file smooth. If income is variable, lenders may average it over time, which can change how much you qualify for.

Local housing liquidity

Lenders also look at how easily homes sell in your area. Thin markets can raise loss risk if a foreclosure happens.

HELOC Versus Home Equity Loan: Rate Behavior That Trips People Up

People often compare a fixed-rate home equity loan to the starting rate on a HELOC and assume the HELOC is cheaper. A HELOC rate can move as its index changes, which can raise the payment later.

If you want a payment that stays flat, a home equity loan can fit better. If you want flexible draws and plan to repay fast, a HELOC can fit. The trade is rate certainty versus flexibility.

If you want a straight explanation of how HELOCs work, including draw periods and repayment periods, the CFPB’s page on what a HELOC is is a solid reference.

Second Table: A Simple Shopping Checklist

Use this checklist to keep comparisons clean and avoid getting locked into a deal that only looks good on the first page.

What To Ask	Why It Matters	What To Write Down
Is this quote based on my credit pull?	Soft quotes can change after a hard pull	Soft vs hard, score band
What CLTV tier is assumed?	CLTV can move with valuation	Max CLTV, tier used
Is the rate fixed for the full term?	Variable rates can rise	Fixed/variable, index, margin
What fees are included in APR?	APR can differ across lenders	APR, total fees
Any prepayment penalty?	Early payoff plans can get costly	Penalty amount and window
Can I roll costs into the loan?	Changes loan balance and interest	Costs rolled or paid up front
How long is the lock?	Locks can expire during delays	Lock days, extension fee
What documents are required?	Missing items slow closing	List of docs

Ways To Nudge Your Rate Lower Before You Apply

You can’t control the market, but you can control your file. Small moves can shift the quote you get.

• Lower card balances a few weeks before applying. High utilization can drag a score down.
• Check your credit reports for errors, then dispute them with the bureau that reports them.
• Know your home value range by checking multiple valuation tools and recent local sales data.
• Shop within a tight window so credit pulls are treated as one event by scoring models in many cases.
• Bring a clear use plan for the money. Lenders may ask whether funds are for renovation, debt payoff, or other uses.

Interest Deduction Notes That Can Change The Real Cost

In the United States, interest on home equity debt is not always deductible, and the rule depends on how the money is used and other limits. If you itemize, the IRS lays out the rules for mortgage interest and home equity interest in Publication 936. Tax rules vary by country, and they can also change, so treat deductions as a bonus, not the plan.

Simple Scenarios To Choose The Right Tool

These scenarios show how people often decide between a first-lien mortgage and a second-lien home equity loan.

If you want the lowest first-lien pricing and can reset your mortgage

A cash-out refinance can work when you plan to keep the home long enough for closing costs to pay back. Compare the new payment and the total interest across the full term, not just month one.

If you want to keep a low-rate first mortgage

If your first mortgage rate is already low, a second lien can let you borrow without touching that first loan. Even with a higher rate, it may keep your blended borrowing cost lower than replacing the whole mortgage.

If you want a fixed payment and a clear payoff date

A home equity loan can fit when you want one lump sum and a payment that stays steady each month.

If you want flexible access and plan to repay fast

A HELOC can fit when you want to draw as needed and pay interest only on what you use, with the trade of a moving rate.

To keep your comparison clean, gather at least two written offers, line up APR and total fees, then pick the structure that matches how you’ll use the funds and how long you’ll keep the balance.