Second Mortgage vs. Home Equity Loan: What’s the Difference?

Thinking about tapping into your home’s value? You may be considering a home equity loan vs. another type of second mortgage. (That’s right: Despite all the confusing jargon, a home equity loan is just a type of second mortgage.) 

But it’s not the only player in the game—other types of second mortgages exist too. Here’s what to consider when comparing second mortgages and home equity loans.

What is a second mortgage?

A second mortgage is an extra loan you take out on a property that already has a mortgage. It’s called “second” because it comes after your primary mortgage in terms of priority for repayment. 

Specifically, “second mortgage” refers to any loan that uses your home as collateral when you already have a first mortgage. Home equity loans and home equity lines of credit (HELOCs) are popular second mortgages. 

A loan is considered a second mortgage or “junior lien” when:

• You already have a primary mortgage on your home.
• You’re borrowing against the equity you’ve built up in your property.
• Your home serves as collateral for the new loan.

Second mortgages allow you to access the value you’ve built up in your home without refinancing your primary mortgage. They typically have higher interest rates than first mortgages because they’re riskier for lenders—if you default, the first mortgage gets paid off before the second.

Tip

When you take out a second mortgage, you add another monthly bill to your plate and increase the total debt you owe. But if used responsibly, it can be a low-cost way to fund home improvements, debt consolidation, education costs, and other major projects.

What is a home equity loan?

A home equity loan is a type of second mortgage you can use to borrow against the equity you’ve built in your home. Equity is your home’s value minus what’s left to pay on your mortgage.

Here’s how a home equity loan works:

1. You receive a lump sum of money upfront.
2. The loan has a fixed interest rate.
3. You repay it in fixed monthly installments over a set term (usually up to 30 years).
4. Your home serves as collateral for the loan.

In other words, a home equity loan can turn your home’s value into cash without selling it. For instance, say your home is appraised at $500,000 and your current mortgage balance is $400,000. Your equity would be $100,000. A home equity loan lender might let you borrow up to 85% of this amount, or $85,000.

Most home equity loans are second mortgages. However, some lenders offer “first lien home equity loans” that replace your existing mortgage. It won’t technically be a second mortgage if you come across one of these products.

Home equity loans generally have lower interest rates than credit cards or personal loans because they’re secured by your property. Like other second mortgages, people often use them for large, one-time expenses.

Home equity loan vs. second mortgage

Now that we’ve covered the basics, let’s dig deeper into the relationship between home equity loans and second mortgages. This distinction will help you understand your borrowing options.

A home equity loan becomes a second mortgage when you already have an existing mortgage on your property. In this common scenario, the home equity loan uses your home as collateral and creates a second lien on your property. It doesn’t replace your first mortgage—it sits alongside it.

Several loan types fall under the “second mortgage” umbrella:

• Home equity loans: Fixed-rate, lump-sum loans.
• Home equity lines of credit (HELOCs): Variable-rate, revolving credit lines.
• Piggyback loans: Used to avoid private mortgage insurance (PMI) when you buy a home. For example, you have one larger mortgage and one smaller one to equal the total mortgage cost. This is typically used when you’re initially purchasing/financing a home.

But remember: Not all second mortgages are home equity loans, and not all home equity loans are second mortgages. Here’s when the lines blur:

• HELOCs: While they’re second mortgages, they’re not home equity loans. HELOCs offer more flexible borrowing options and typically have variable interest rates.
• Piggyback loans: Used during home purchases, these are second mortgages but not home equity loans.
• First-lien home equity loans: These pay off your existing mortgage and become your primary mortgage. In this case, the home equity loan isn’t a second mortgage at all.
• Home equity loans on paid-off homes: If you own your home outright, a home equity loan might be considered a first mortgage, not a second.

Tip

Think of it like this: It’s similar to how an SUV is a specific type of vehicle, but there are also other types of vehicles—like sedans, hatchbacks, and trucks. There are several common types of second mortgages, and a home equity loan is just one of them. 

Pros and cons of a second mortgage

Pros

• Lower interest rates

  Second mortgages typically have lower interest rates than credit cards and personal loans not secured by your property.

• Large loan amounts

  You can often borrow more with a second mortgage than with unsecured loans, depending on how much home equity you have.

• Potential tax benefits

  If you use your second mortgage for home improvements, the interest you pay on your loan may be tax deductible. Or, if your second mortgage is part of a piggyback loan, the interest could be tax deductible, and no home improvement is needed since it is a loan acquired during the initial home purchase.

• Multi-use loan

  With your primary mortgage, you could only use the funds to purchase a house. But with a second mortgage, you can use the money for all sorts of things like consolidating high-interest debt, paying for education expenses, renovating your kitchen, and more.

Cons

• You risk foreclosing

  The biggest drawback of any type of second mortgage, including home equity loans, is that you use your home as collateral. If you can’t repay, your lender could take your property.

• Adds to your debt

  Taking on a second mortgage increases your total debt and thus adds another monthly payment to your budget.

• Closing costs and fees

  Many second mortgages come with closing costs and fees, just like with your original mortgage.

• Potential to go “underwater”

  If home prices drop, you might owe more than your house is worth. This can make it tough to sell or get a new loan.

Ask the expert: Who are the best candidates for second mortgages?

Erin Kinkade

CFP®

In my experience and observations, second mortgages, in terms of piggyback mortgages, are best for new home buyers, those with thin (or poor) credit, and to avoid paying PMI. A second mortgage as a HELOC or HEL is appropriate for those who can afford the additional payment without compromising their cash flow (and their other important life goals), have a significant amount of equity in their home to avoid foreclosure or falling victim to falling home prices (becoming underwater on their loan), and have a reasonable need to acquire the funds (home improvement, consolidate debt, pay for education, help cover an unexpected medical cost, etc.)

Should I get a HELOC or home equity loan as a second mortgage?

Both HELOCs and home equity loans let you borrow against the equity in your home. But there are some differences. This table highlights the biggest differences:

• Home equity loans give you a one-time lump sum of cash, while HELOCs are a revolving line of credit. 
• Home equity loans have fixed interest rates, while HELOCs have variable rates. 
• Home equity loans have fixed monthly payments, while HELOCs may have interest-only payments during the draw period, followed by full payments in the repayment period. 

Here are scenarios where one product might make more sense than the other: 

Home equity loans may be a good idea when you know the full cost of an expense upfront. Examples: 

• Debt consolidation
• Home renovation projects with a set budget
• Major purchases, like a new roof or a wedding
• Situations where you prefer fixed interest rates and predictable payments

HELOCs usually make more sense for ongoing or multiple expenses over time. Examples:  

• Home improvement projects with uncertain costs
• A back-up emergency fund you’re not sure you’ll need
• Paying for college tuition across multiple semesters
• Covering recurring business expenses
• Situations where you want to borrow from your equity, pay it off, and then borrow again without having to apply for a new loan each time

Ask the expert: When is a second mortgage not a good idea?

Erin Kinkade

CFP®

If the additional mortgage or adding a mortgage payment into your budget results in a restrictive cash flow, I suggest you either wait or lower the amount you borrow. It is also important to consider the interest rate environment and economic outlook on the housing market. If interest rates are expected to drop, I suggest waiting until that happens. If the housing market (depending on their geographical area) is unstable, it may be wise to look at other borrowing options that would lessen the chances of placing your home at risk.