Second Mortgage vs. Home Equity Loan

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There’s some confusion surrounding the terms “second mortgage” and “home equity loan.” So, let’s be clear: A home equity loan is a type of second mortgage. But that’s not all you should know.

Here’s what else you need to know about second mortgages and home equity loans:

What is a second mortgage?
What is a home equity loan?
An alternative to second mortgages

What is a second mortgage?

A second mortgage is another home loan taken out against an already-mortgaged property. They are usually smaller than a first mortgage.

The two most common types of second mortgages are home equity loans and home equity lines of credit (HELOC).

Like a first mortgage, your home is used as collateral for a second mortgage. Should a foreclosure happen, the first mortgage lender is first in line to get repaid. The second mortgage lender is repaid next.

Good to know: Since second mortgages are riskier for the lender, interest rates on them tend to be a bit higher than interest rates on first mortgages.

What is a home equity loan?

A home equity loan is a type of second mortgage that lets you borrow against your home’s value. You’ll get the proceeds from a home equity loan in a lump sum — similar to a personal loan — and the loan’s interest rate will be fixed.

By contrast, a HELOC allows you to borrow smaller sums as needed, and the interest rate is usually variable. Traditionally, you’ll need to retain 20% equity in your home to qualify for a home equity loan.

Here’s an example of how someone could access their equity through a home equity loan:

Home value: $250,000
Mortgage balance: $150,000 or 60% of the home’s value
Equity to retain: 20% or $50,000
Equity available to borrow: 20% or $50,000

Tip: Some lenders might allow you to retain as little as 10% equity when you take out a second mortgage, but they might also require you to pay for private mortgage insurance or charge you a higher interest rate.

While a home equity loan would give you $50,000 up front in the above example, a HELOC would give you access to a $50,000 line of credit. You might never borrow the full $50,000, and you’ll only pay interest on the amounts you actually borrow.

Here are the most important differences between a home equity loan and HELOC:

	Home equity loan	Home equity line of credit (HELOC)
Second mortgage	Yes	Yes
*Disbursemnt**	Cash up front in one lump sum	Draw cash as needed, up to limit
Repayment	Fixed monthly payments	Open-ended. Interest-only payments often allowed during draw period
Interest rate	Typically fixed	Usually variable
Interest charges	Interest charges apply to entire loan balance	Only pay interest on amount you draw

Check out: Should You Get a Home Equity Loan for Debt Consolidation?

An alternative to second mortgages

One alternative to a second mortgage is a cash-out refinance. With a cash-out refi, you pay off your existing mortgage with a new, larger mortgage and pocket the difference.

Tip: You can use the cash from a cash-out refinance however you want, just like you can with a home equity loan or line of credit. Like those options, you’ll need to have 20% equity left after the cash-out refinance unless you’re willing to pay private mortgage insurance.

Second Mortgage vs. Home Equity Loan - Credible (2024)

What is a second mortgage?

What is a home equity loan?

An alternative to second mortgages