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

One advantage to homeownership is that it gives you more options when you need to cover a major expense. For example, if your home is worth more than you owe, you could borrow against your home's extra value with a second mortgage.

A second mortgage is any loan taken out on a home that already has a primary mortgage. A home equity loan is a common type of second mortgage that provides a lump sum loan with fixed monthly payments.

While the two terms are often used interchangeably, they're not quite the same. Understanding the differences could help you decide if a home equity loan is the right move.

What is the difference between a second mortgage and a home equity loan?

Most home equity loans are second mortgages, but not all second mortgages are home equity loans. The term second mortgage refers to any home loan you take out on top of your primary mortgage (the one you used to buy the house). 

If you already have a mortgage and you take out a home equity loan, the home equity loan becomes your second mortgage. However, if you've already paid off your primary mortgage and own your home outright, the home equity loan would be your only mortgage.

What is a second mortgage?

A second mortgage is a category encompassing several types of loans. Generally, second mortgages are home loans that you get while you still have a first mortgage (typically the one that you used to buy the home). 

Second mortgages offer a way to turn your home’s equity—its value over what you owe—into spendable cash.

Lenders distinguish between first and second mortgages to specify which one takes priority for repayment if you sell your home. Proceeds from the sale go to the first mortgage before any money is paid to the second. Once both mortgages are paid, what's left goes to you. First mortgages also get priority when a home is sold through the foreclosure process.

Why get a second mortgage?

People take out a second mortgage for many reasons. For one thing, it's often a less expensive way to borrow compared to other options like credit cards or personal loans. Mortgages are secured loans—that means you pledge something valuable (your home) as a guarantee that you’ll repay your loan. Pledging a valuable asset lowers the risk for the lender, so it’s normal for secured loans to come at a lower cost than unsecured loans. 

Second mortgages could also allow you to borrow larger amounts. That's an advantage if you need to tackle a major expense, like a roof replacement or a kitchen remodel. The amount you can borrow is determined in part by your home's value. 

There's also a potential tax incentive to get a second mortgage vs. other types of loans. The interest you pay on a second mortgage may be tax-deductible if you use the money to build, buy, or substantially improve the home you borrowed against. Consult a tax advisor for more details on tax deductibility. 

What is a home equity loan?

A home equity loan is one common type of second mortgage. It allows you to access your home equity, using your home as collateral. Home equity is your home’s current market value minus the amount you owe on your mortgage. 

Home equity loans could give you access to a lump sum, typically at a fixed interest rate. You could use the money to pay off a large expense, consolidate high-interest debt, fund home improvements, or cover unexpected bills. You make payments to a home equity loan, in addition to your regular mortgage payments, for the term set by your lender.

Are a second mortgage and a home equity loan the same thing?

A home equity loan is a mortgage. If you’re still paying off your primary mortgage, your home equity loan fits the second mortgage definition. If you don’t have any other mortgage, your home equity loan would be a first mortgage. The key detail to understand is that “second mortgage” is a broad category, while a home equity loan is a specific type of home loan.

Another type of second mortgage is called a home equity line of credit (HELOC).

The way HELOCs work is that they have a credit limit, like a credit card. A HELOC lender may even give you a credit card or checkbook you could use to make purchases with HELOC funds. You can make purchases and payments repeatedly during the draw period, which usually lasts a few years (varies by lender). After the draw period ends, you can’t borrow any more, and you’ll start repaying the loan in equal monthly payments.

The HELOC from Achieve Loans combines the best features of home equity loans and HELOCs: a fixed interest rate and a draw period. Your rate doesn’t change, even if you need to access the line of credit multiple times. During the five-year draw period, you can borrow, repay, and borrow more as often as you like, up to your credit limit.

A third type of second mortgage is called a piggyback loan.

A piggyback loan is an extra loan that’s meant to cover part of the down payment when you buy a home. It’s a way to avoid having to pay for private mortgage insurance, which is an extra cost for most loans when the down payment is less than 20% of the purchase price.

A cash-out refinance is not a second mortgage.

Some people think that a cash-out refinance is a second mortgage, but it's actually a replacement for your first mortgage. You take out a new, larger loan based on your home's value. Your lender pays off your original mortgage and gives you the difference between your existing mortgage balance and the new loan amount in cash. This is an alternative to a home equity loan if you want to access your home's equity and aren't happy with your current loan terms.

What are the key differences between a second mortgage and home equity loan?

A second mortgage and a home equity loan are both mortgages secured by your home. Sometimes, they’re the same thing—but not always.

A second mortgage isn’t always a home equity loan. A home equity loan, home equity line of credit, or piggyback loan could each be a second mortgage if you still have a first mortgage that you’re paying down.

A home equity loan isn’t always a second mortgage. If you have a mortgage and you get a home equity loan, it would be a second mortgage. But if you own your home free and clear and get a home equity loan, it would be a first mortgage.

Which is better, a second mortgage or a home equity loan?

If you're getting a home equity loan, you're most likely getting a second mortgage unless you've already paid off the loan you got to buy the property. So there's no question of whether a second mortgage or home equity loan is better since, in this case, they're the same thing. 

You may, however, want to weigh the pros and cons of a home equity loan to decide if it's right for you. Here are some of the main advantages and disadvantages to know.

Home equity loan advantages explained

Consolidate high-interest debt. A home equity loan or HELOC typically comes with lower average interest rates than credit cards. If you have high-interest debt, It’s possible to reduce the cost of that debt by refinancing it to a loan with a lower rate. Another benefit is that you could combine multiple monthly payments into just one, and possibly end up with a lower total monthly payment than you’re making now. That could help if you’re struggling to make your payments or you need some relief in your budget.

Pay for one-time expenses over time. Borrowing against your home could help you cover a large expense without having to come up with all of the money upfront. For instance, if you need a new roof but don’t have the cash on hand, paying for it with a loan could allow you to get the work done before your home is damaged by next year’s rainy season. 

Fast access to money. Getting a HELOC or home equity loan is usually faster than getting a first mortgage. Home equity loans are often funded within a couple of weeks, depending on the lender. That’s a lot faster than most primary mortgages. 

Home equity loan drawbacks explained

Separate monthly payments. If you get a home equity loan or HELOC, you’ll make that payment separately from your existing mortgage payment. 

Interest rate may be higher than a first mortgage. On average, interest rates on home equity loans tend to be a little bit higher than what’s available for purchase mortgage loans.

Default could put your home at risk. Default happens when a loan goes unpaid. If you’re unable to pay your home equity loan for any reason, legal action could compel you to pay. That could include foreclosure, which may lead to the forced sale of the home. 

How this compares to a HELOC

A home equity line of credit (HELOC) is another type of second mortgage. Instead of a single lump sum like a traditional home equity loan, a HELOC gives you access to a line of credit.

During the first few years, called the draw period (length varies by lender), you can borrow, repay, and borrow again, up to your limit, as much as you want. After the draw period ends, you stop using your credit line and focus on making regular monthly payments on your outstanding balance.

While some HELOCs have fixed interest rates, others have variable interest rates like credit cards. This could make payments a little less predictable than home equity loans.

When comparing HELOCs vs. home equity loans, a key factor to bear in mind is how often you think you'll need to borrow money. A home equity loan may be enough if you only expect one large expense. If you think you'll need to borrow money on multiple occasions, a HELOC may suit you better. 

For example, if you're trying to consolidate a large amount of debt, a one-time home equity loan could be a good fit. If you're doing home renovations and you anticipate a long project with several phases, a HELOC might be better because you’ll have multiple opportunities to withdraw the cash you need.

Home equity loan from Achieve Loans

A home equity loan could help you work toward your financial goals or pay for unexpected expenses when a rainy day comes along. An Achieve Loans home equity line of credit could give you access to up to $300,000 in funding, with fixed rates and repayment terms that fit your monthly budget. You could get a loan decision in minutes and receive loan funds in as few as 10 business days. 

All you need to do to get started is answer a few simple questions to find out if you prequalify. You can talk to a mortgage expert to customize your home equity loan to fit your needs. Apply now.