Second mortgage vs. home equity loan: What's the difference?

One of the advantages of homeownership is that it may give you more borrowing options when you need to cover a major expense. If your home is worth more than you owe on it, you could borrow against that extra value with a second mortgage.

A second mortgage is any new home loan taken out on a property that already has a mortgage. A home equity loan is a common type of second mortgage that gives you a lump sum of money and fixed monthly payments. 

The two terms are often used interchangeably, but they are not quite the same thing. Understanding the differences could help you decide if a home equity loan is the right move for your situation.

What is a second mortgage?

A second mortgage is a broad category that covers several types of loans. In general, second mortgages are home loans you get while you still have a first mortgage, typically the one you used to buy the home. The key feature of any mortgage is that it’s secured by the piece of real estate. In other words, if you don’t repay the loan, you could lose your home.

Second mortgages offer a way to turn the equity you have in your home into spendable cash. Home equity is your home's current market value minus the amount you owe on your mortgage. 

The time “first” or “second” matters is when the home is sold. In most cases, proceeds from a sale go to the first mortgage lender before any money is applied to the second balance. If there is not enough equity to cover both loans, the second mortgage lender may not receive the full amount owed. 

First mortgages generally get priority during the foreclosure process as well. 

Because second mortgage lenders take on more repayment risk than first mortgage lenders, interest rates on second mortgages tend to run a bit higher than first mortgage rates.

Types of second mortgages

Three common types of second mortgages are:

• Home equity loans: A one-time loan at a fixed interest rate, repaid in equal monthly installments over a set term.

• Home equity lines of credit (HELOCs): A revolving line of credit with a borrowing limit you draw from by borrowing, repaying, and borrowing again. Most HELOCs carry variable rates, though fixed-rate options exist.

• Piggyback loans: An extra loan used to cover part of a down payment when you buy a home, often to avoid private mortgage insurance, which is an extra monthly cost typically required when the down payment is less than 20% of the purchase price.

Note: A cash-out refinance is not a second mortgage. It replaces your first mortgage with a new, larger loan. Your lender pays off your original mortgage and gives you the difference between your first mortgage balance and the new loan amount in cash.

What is a home equity loan?

A home equity loan is one type of second mortgage. It's a way for you to borrow money against your home equity. The arrangement uses your home as collateral.

Home equity loans provide a one-time loan amount at a fixed interest rate. You make regular monthly payments over a term set by your lender, in addition to your first mortgage payment. You could use the funds to consolidate high-interest unsecured debt, cover home improvements, pay for education, or address unexpected expenses.

Funding timelines on home equity loans are often shorter than on primary mortgages, depending on the lender.

What is a HELOC?

A HELOC is sometimes confused with a home equity loan, but they are not the same. A home equity line of credit (HELOC) is an option that gives you access to a revolving line of credit rather than a one-time loan. 

Most HELOCs carry variable interest rates, which means monthly payments could change over time as rates change. Achieve Loans offers a fixed-rate HELOC, which combines a stable rate with flexible access to funds.

Second mortgage vs. home equity loan: Key differences

Many second mortgages are home equity loans. Most home equity loans and HELOCs are second mortgages. Both a home equity loan and a HELOC are second mortgages if you still have a primary mortgage, but they work differently.

What could you use a second mortgage for?

People take out second mortgages for many reasons. Some common uses include:

• Consolidate high-interest unsecured debt such as credit card balances

• Fund home renovations and improvements

• Cover major medical expenses

• Pay for higher education costs

• Purchase a second property

Because second mortgages are secured loans (guaranteed by your home) they typically come with lower interest rates than unsecured options like credit cards. That could make them a less expensive way to finance a large expense.

A second mortgage used to buy, build, or substantially improve the home that secures the loan may also offer a tax advantage. The interest could be deductible in those cases. Interest used for other purposes, such as debt consolidation, education costs, or medical expenses, is generally not deductible under current tax law. A tax advisor may be able to help you evaluate whether a deduction applies to your situation.

Closing costs and fees on second mortgages

Second mortgages typically come with closing costs, which could include origination fees, an appraisal fee, title search fees, and recording fees. Some lenders offer options that reduce or eliminate upfront closing costs, though that cost is often reflected in the loan balance or interest rate instead. Factor in total borrowing costs, not just the interest rate, to get a clear picture of what a second mortgage could cost overall.