Second mortgage versus home equity loan: Are they the same thing?

By Gideon Sandford

Reviewed by Kimberly Rotter

Mar 23, 2023

Read time: 5 min

Young Afro-American man with his hands folded standing in front of his home. He has a big smile.

Key takeaways:

  • A second mortgage is a home loan that you get while you still owe money on your first mortgage.

  • A home equity loan lets you borrow against the value of your home, even if you’re still paying off your first mortgage.

  • You don’t have to already have a mortgage to apply for a home equity loan.

There’s a sense of satisfaction that comes with taking on your big financial goals. One advantage to homeownership is that it can give you more options when you need to cover a major expense. Borrowing against your home is a way to access cash without having to sell your home, and there are a few different ways you can do it.

What is a second mortgage?

A second mortgage is a home loan that you get while you still have a mortgage. It’s a way to unlock your home’s value, turning it into spendable cash.

Why get a second mortgage?

There are lots of reasons to take out a second mortgage. For one thing, the cost can be lower compared to other borrowing options. 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. 

If you have equity, a home equity loan or home equity line of credit (HELOC) might let you access it without selling your home. Equity is your home’s current market value minus the amount you owe on your mortgage. You can use the money to pay off a large expense, like more costly debt, home improvements, or unexpected bills.

Is a home equity loan a second mortgage?

A home equity loan is a type of mortgage. If you still have a mortgage, then your home equity loan would be a second mortgage. 

With a typical home equity loan, you get a lump sum when your loan is finalized, at a fixed interest rate. You can use a home equity loan to pay off high-interest-rate debt, pay for home improvements, or cover other large expenses like medical or dental bills. Depending on your income and credit score, a home equity loan or HELOC might save you money compared to credit cards or a personal loan.  

Is a HELOC a second mortgage?

A home equity line of credit (HELOC) is another kind of second mortgage. 

A HELOC has a credit limit, like a credit card. A HELOC lender may even give you a credit card or checkbook you can use to make purchases with HELOC funds. You can make purchases and payments repeatedly during the first few years (called the draw period). After the draw period ends, you can’t borrow any more, and you’ll start repaying the loan in equal monthly payments.

The best kind of HELOC is a fixed-rate HELOC, where you get the benefit of a draw period and an interest rate that doesn’t change, even if you need to access the line of credit multiple times. 

Does my second mortgage affect my first mortgage?

A second mortgage is junior to a first mortgage. The order affects your costs as well as what steps the lenders can take if something were to happen that prevents you from paying your loans as agreed. If that happens and your home is sold, the first mortgage lender is paid off first. The second lender is paid off from the money that’s left. 

This is why advertised interest rates on second mortgages may be a little higher than advertised rates on first mortgages.

Pros and cons of a second mortgage

Advantages of a second mortgage

Disadvantages of a second mortgage

Consolidate high-interest-rate debt

Two monthly payments to keep track of

Pay for one-time expenses over time

Interest rate may be higher than first mortgage

Fast access to money

May have a variable interest rate

Second mortgage advantages explained

Consolidate high interest debt. A home equity loan or HELOC comes with lower average interest rates than credit cards. If you have high interest debt, you could reduce the cost of that debt by refinancing it to a loan with a lower rate. Another benefit is that you can combine several monthly payments into just one. 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 up front. 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. The typical time to fund is 15-18 days. 

Second mortgage drawbacks explained

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

Interest rate may be higher than first mortgage. On the off chance that you end up unable to repay your debts, there is an order in which your creditors will be repaid from your assets. If your home is sold to pay off your debts, the first mortgage lender is repaid first. The second mortgage lender is paid off if there’s enough money left. For this reason, second mortgages cost a little more.

May have a variable interest rate. Typical HELOCs have a variable interest rate. That means your future monthly payments are unpredictable and your costs could go up. You can protect yourself with a fixed-rate HELOC, which allows you to get a fixed interest rate the day your loan closes along with the flexibility to borrow as needed during the draw period.

Gideon Sandford

Gideon is a financial expert who writes about financial planning, access to credit, and debt strategies. He has over a decade of experience helping readers manage their money and use debt responsibly.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

A home equity loan works a lot like a first mortgage. A lender will ask questions about you and about your home. They’ll want to check your credit report and credit score. They will probably want verification of your income, such as recent paystubs. Then they’ll calculate how much equity you have in your home. That means subtracting any current mortgage balances from your home’s value. Many lenders won’t let you borrow more than 80% of your home’s value.

With a cash-out refinance loan, you borrow enough to pay off the remaining balance on your first mortgage, plus more. The amount you borrow on top of your old mortgage is cash that you can spend. 

For example, if you owe $100,000 on your current mortgage, you might borrow $120,000 with a cash-out refinance loan. $100,000 will go to paying off your old mortgage, and you’ll receive $20,000 in cash. 

Cash-out refinance loans and home equity loans can both make sense in certain situations. Cash-out refinancing can be better if you prefer not to have two separate payments, or if interest rates have gone down since you took out your first mortgage. A home equity loan can be better if you are happy with your current mortgage and don’t want to change it. A home equity loan may also be easier to qualify for.

Home equity loans and HELOCs are similar but not the same. Home equity loans are given in a lump-sum amount. You’ll pay interest on the total amount borrowed, even if you’re not ready to use it yet. A HELOC gives you the flexibility to withdraw only as much as you need, up to your maximum loan amount. Also, a HELOC lets you borrow, make payments, and then borrow again as often as you like during the first few years after you get the loan. So a HELOC is more flexible than a home equity loan. 

Home equity loans typically have a fixed interest rate that won’t ever change. Standard HELOCs have a variable rate that makes the cost of borrowing unpredictable. Fixed-rate HELOCs let you lock your interest rate in and also take advantage of a draw period.

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