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

There’s a sense of satisfaction that comes with taking on your big financial goals. One advantage to homeownership is that it could give you more options when you need to cover a major expense. You could apply for a second mortgage against your home to access cash and pay it back over time.

A home equity loan is one type of second mortgage. Let's look at the difference between a second mortgage and a home equity loan to help you understand how they work.

What is a second mortgage?

A second mortgage is a home loan that you get while you still have a mortgage (typically the one that you used to buy the home). Second mortgages offer a way to turn your home’s value 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?

There are lots of reasons to take out a second mortgage. For one thing, the cost could be lower compared to other borrowing options, such as 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 a secured loan that 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 is a second mortgage. 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 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 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.

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.

A second mortgage isn’t always a home equity loan. There are different kinds of second mortgages. 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.

Likewise, 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 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. Home equity loans are often funded within a couple of weeks. 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 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. 

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 low, 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.