Second mortgages and home equity loans are one in the same. Technically a home equity loan is a 2nd mortgage, because the equity loan or HELOC sits in second position on title to the house. Both home equity loans and 2nd mortgages are ways to borrow against the value of your home so its silly to listen to loan officers compare the two different loan products.
What Are the Differences between Second Mortgages and Home Equity Loans?
Both of these financing options employ your home as collateral, but there exist distinctions between the two types of 2nd mortgage programs, the HELOC and home equity loan.
A home equity loan features a fixed simple interest rate and is settled through consistent monthly payments, whereas a second mortgage may transition from a fixed to a variable interest rate.
Compare Home Equity Loans vs. HELOC
A home equity line of credit (HELOC) provides the flexibility to withdraw funds from a line of credit, while a second mortgage disburses a lump sum.
Both alternatives share common advantages and disadvantages, including the risk of foreclosure in case of non-repayment, the potential for negative equity, as well as supplementary loan fees and associated charges.
Learn more below about your options with a second mortgage, home equity loan credit, and other alternatives.
What Is a Second Mortgage?
A 2nd mortgage is another loan taken against your home that already has a mortgage. Homeowners often take out second mortgages to fund home improvements, such as home renovations, paying off debt, or funding college tuition. 2nd-mortgage lenders offer equity loans and credit lines.
There are two types of second mortgages that you can choose to access some of your home equity.
Home Equity Loan
- A home equity loan is a fixed-rate, lump-sum loan with a term ranging from five to 30 years. The homeowner pays back the loan in fixed payments each month until the loan is paid off.
- A home equity loan might be a good choice for you to fund a one-time major expense, such as buying a second home or paying down credit cards.
- Borrowers may lower their monthly expenses with debt-consolidation from a home equity loan.
- Home equity loans have fixed rates and the payments are locked in for the life of the loan, which makes your budgeting easier.
- Your home secures the home equity loan, so you risk losing the property if you do not pay.
Home Equity Line of Credit (HELOC)
- A home equity line of credit is another type of second mortgage. It has a variable interest rate and a credit line that you can draw from when you need it.
- Home equity lines typically features a draw period of 10 years with interest-only payments during this time. After the draw period ends, you repay both principal and interest.
- Minimum monthly payments are based on a variable interest rate. You can use the funds again as you pay off the credit line.
- Homeowners may choose a HELOC if they anticipate making periodic payments for a home remodel or college tuition.
- Some homeowners also like to have a line of credit available for financial emergencies. However, if your credit slips or you lose your job, your lender could reduce your credit line or even close it.
When to Choose: Home Equity Loan (Specific Second Mortgage Type) vs Other Second Mortgage Options
| Factor | Choose Home Equity Loan (Fixed Second Mortgage) When… | Choose HELOC (Revolving Second Mortgage) When… |
|---|---|---|
| LOAN STRUCTURE & PAYMENTS | ||
| Payment Predictability | Want fixed monthly payment Same payment for entire 5-30 year term, easier budgeting |
Can handle variable payments Payments fluctuate with prime rate changes |
| Interest Rate Type | Prefer rate certainty Fixed 7.90-8.15% APR for loan life |
Want lower initial rate Variable 7.25-7.63% APR (currently lower but can rise) |
| Fund Disbursement | Need lump sum immediately Full amount at closing for one-time expense |
Draw funds as needed Access over 5-10 year draw period, pay interest only on drawn amounts |
| PROJECT TYPE & USAGE | ||
| Project Timeline | Single-phase project Debt consolidation, vehicle purchase, one-time renovation with known costs |
Phased or ongoing projects Multi-month renovations, ongoing expenses, uncertain timeline (6-18 months) |
| Known vs Unknown Costs | Exact amount needed known Can borrow precise amount without excess |
Uncertain total costs Flexibility to draw more or less as project progresses |
| Reusability | One-time funding only Cannot re-borrow; must apply for new loan |
Revolving credit line Borrow, repay, re-borrow during draw period (like credit card) |
| FINANCIAL SITUATION & PLANNING | ||
| Rate Environment | Expect rates to rise Lock in today’s rate before increases |
Expect rates to fall or stay stable Benefit from rate decreases; current rates already lower |
| Budget Stability | Fixed income or tight budget Need predictable payment for financial planning |
Variable income or flexible budget Can absorb payment changes if rates rise |
| Cash Flow Management | Start principal payments immediately Higher initial payments including principal + interest |
Minimize initial payments Interest-only during draw period (5-10 years) |
| INTEREST RATES & TOTAL COSTS | ||
| Current Rate | 7.90-8.15% APR Fixed for entire term |
7.25-7.63% APR Variable, currently 0.50-0.75% lower |
| Total Interest Paid | Higher if rates drop Locked into higher rate if market improves |
Only pay on borrowed amounts Don’t pay interest on unused credit line |
| Rate Risk | Zero rate risk Rate never changes regardless of market |
Significant rate risk Payment increases if prime rate rises (2-3% swing possible) |
| TAX BENEFITS & EQUITY REQUIREMENTS | ||
| Tax Deductibility | Deductible for home improvements Fixed amount easy to track and document |
Deductible for home improvements Must track each draw usage separately |
| Home Equity Required | 15-20% minimum equity 80-85% CLTV standard |
15-20% minimum equity 80-85% CLTV standard (same as home equity loan) |
| Credit Score | 620-680 minimum 700+ for best rates |
680-720 minimum Slightly higher requirements |
| FLEXIBILITY & SPECIAL FEATURES | ||
| Early Payoff | May have prepayment penalties Check loan terms; some restrict early payoff |
Usually no prepayment penalties Pay down or off anytime without penalty |
| Conversion Option | Cannot convert to HELOC Loan structure is permanent |
Can convert to fixed rate Many HELOCs allow converting all/portion to fixed-rate loan |
| Emergency Access | No ongoing access Must apply for new loan for future needs |
Ongoing emergency fund Acts as financial safety net during draw period |
| CLOSING COSTS & APPROVAL PROCESS | ||
| Closing Costs | 2-5% of loan amount $1,500-5,000 on $75,000 loan |
Often lower or waived Some lenders waive costs with minimum draw requirements |
| Approval Timeline | 30-45 days typical Standard processing time |
14-45 days Sometimes faster, depends on lender |
| Documentation | Standard requirements Tax returns, pay stubs, appraisal, title work |
Standard requirements Same documentation as home equity loan |
| IDEAL USE CASES | ||
| Perfect For | Best for: • Debt consolidation (known payoff amount) • Major one-time purchase (vehicle, boat) • Single-phase renovation (kitchen remodel) • Education expenses (tuition lump sum) • Medical bills (specific amount) • Borrowers wanting rate certainty |
Best for: • Multi-phase home renovations • Ongoing education expenses • Business startup costs • Emergency fund access • Uncertain project costs • Borrowers comfortable with rate changes |
Key Distinction: Home equity loans are a specific TYPE of second mortgage (fixed-rate, lump-sum). HELOCs are another TYPE of second mortgage (variable-rate, revolving). Both are second mortgages, but serve different needs. Choose home equity loans for predictable payments and one-time expenses (7.90-8.15% APR fixed per BankRate.com). Choose HELOCs for flexible access and phased projects (7.25-7.63% APR variable per BankRate.com). Both require 15-20% equity and use your home as collateral.
How Is a Home Equity Loan and Second Mortgage Calculated?
Lenders usually only allow you to take out a certain portion of your home equity. How much you can get depends on the home’s value and how much you owe on your first mortgage. Most 2nd-mortgage lenders allow you to take out up to 80% or 85% of your home’s value.
To determine how much money you can get, add how much you want to borrow to what you owe on your first mortgage. Divide that sum by your home’s current appraised value. That gives you your loan to value or LTV. For example, if your home is worth $300,000 and you owe $200,000 on your first mortgage, you have $100,000 of equity.
Most lenders will allow you to borrow up to $80,000 or $85,000 of your available equity. Taking out a second mortgage would give you a new loan balance of approximately $280,000.
Are Rates for Home Equity Loans and Second Mortgages Higher Than First Mortgages?
Generally, 2nd mortgage loan rates are higher. The mortgage lender is taking a bigger risk with a second mortgage loan. If you qualify for the second mortgage, the lender puts a new lien on the home. The second lien holder gets paid second in the event of a foreclosure. So, the rates for second mortgages reflect that higher risk. Still, rates for second mortgages are generally much lower than for personal loans or credit cards.
When Is a Second Mortgage a Good Idea?
Taking out a second mortgage may be right for you if you have a big expense but already have a low rate on your first mortgage. Most mortgage experts only recommend refinancing a first mortgage if you can save at least .5% on your rate. Getting a home equity loan or HELOC also can be a great move if you want money for something that has a solid return. Examples are a home improvement, a college education, or buying an investment property.
Second mortgages also can be used to pay off high-interest credit card debt, but beware of running up those credit cards again!
The mortgage interest on a second mortgage is tax-deductible IF you are using it to make a major improvement to your home. Examples are a kitchen or bath remodel, adding a swimming pool, or family room addition. Is it better to refinance or take out a home equity loan?
Should You Get a Home Equity Loan or a Line of Credit?
What is your risk tolerance? A home equity loan has a fixed interest rate and set payments for the life of the loan. People who like more financial certainty may prefer a home equity loan.
On the other hand, a home equity line of credit has a lower interest rate at first. But the rate can rise considerably in the future. If you can sleep at night with this uncertainty, a HELOC loan could work for you.
Also consider if you need a big sum of money right now, or funds periodically over time. A home equity loan gives you all your available equity immediately, and you pay interest on all of it from day one. A HELOC provides funds to you as you need them, and you only pay interest on what you use. Check today’s HELOC rates.
If you want to pull out the cash you need, it may be time to consider a HELOC with a low rate! This second mortgage is a great opportunity to obtain cash for home renovations and much more at a price much more affordable than personal loans and credit cards. More banks and lenders are beginning to approve the 2nd mortgage with bad credit.
Why Get a HELOC In Rising Interest Rate Markets?
A HELOC, which is a type of second mortgage, allows you to pull equity out of your home so you can use it for what you wish. While HELOCs have higher rates than first mortgages, they still are competitive and some of the least expensive money you can borrow. Getting a HELOC in a time of higher interest rates could help you get the cash you need when it doesn’t make sense to refinance your first mortgage.
HELOCs have been quite popular during the pandemic as many people lost jobs and hours and were strapped financially. If your home equity rates rise you can always refinance your HELOC into a new mortgage.
Why Do People Get HELOCs?
Many homeowners use their HELOC funds to pay off high-interest credit card or personal debt. This can be helpful with some credit cards charging 25% or more. Other options are to pay for a college education or pay for a vacation. But whether it’s worth using your equity and having a higher payment for those purposes is up to you.
HELOCs May Offer Tax Deductions Tapping your home equity for home renovations also carries other advantages. The IRS will let you write off some interest on home equity interest if you itemize on your tax return. With the new tax law enacted in 2017, married couples can deduct mortgage interest on up to $750,000 of mortgage debt if the debt is used for home improvements. The tax deduction works on first mortgages, HELOCs, and home equity loans. Read about HELOC interest and tax deductibility.
You never know what mortgage rates will do, but it seems likely that rates are on an upward trajectory. So, lock in your rate by talking to your lender about a HELOC today. Learn about the differences between cash out refinancing and home equity loans,
Takeaway on 2nd Mortgages and Home Equity Loans
Home equity mortgages and HELOCs are different types of second mortgages. Both pull equity from your home that you can use for cash purchases.
Home equity loans feature a fixed-rate, while HELOCs feature a variable interest rate.
Second mortgages may be the right choice for low-interest funds when your first mortgage rate is low and refinancing is out of the question. Talk to your mortgage lender to see if a home equity loan or HELOC is appropriate for your financial needs.
References
- Second Mortgages vs. Home Equity Loans
- How Does a Home Equity Line of Credit Differ from a Second Mortgage?
Second Mortgage vs Home Equity Loan FAQ
What is the difference between a second mortgage and a home equity loan?
Second mortgage is the broader term describing any loan secured by your home after your primary mortgage, while home equity loan is a specific type of second mortgage. All home equity loans are second mortgages, but not all second mortgages are home equity loans. Second mortgages include home equity loans (fixed-rate lump sum), HELOCs (variable-rate revolving credit), and piggyback loans (used during purchase to avoid PMI). Home equity loans specifically provide one-time lump-sum funding with fixed interest rates (7.90-8.15% APR in 2026) and fixed monthly payments over 5-30 years. Both use your home as collateral, are subordinate to your first mortgage in foreclosure proceedings, and require equity to qualify (typically 15-20% minimum). The terms are often used interchangeably in casual conversation.
Is a home equity loan the same as refinancing?
No, home equity loans and refinancing are fundamentally different. Home equity loans are second mortgages keeping your original mortgage in place—you make two separate monthly payments. Refinancing replaces your existing mortgage with a new loan, combining principal balance plus cash-out into one payment. Home equity loans make sense when your current mortgage has favorable rates you want to preserve (below 5-6%). Refinancing works better when securing lower rates than your current mortgage or consolidating high-rate debt. Costs differ significantly: home equity loans charge 2-5% closing costs on new loan amount only, while refinancing charges 2-5% on entire mortgage balance. For example, accessing $50,000 on $300,000 home costs $1,000-2,500 with home equity versus $6,000-15,000 refinancing the full $300,000. Timeline: home equity loans close in 30-45 days, refinancing takes 30-60 days.
Can you have two mortgages on the same property?
Yes, you can have two mortgages on the same property—a first mortgage and a second mortgage (home equity loan or HELOC). Lenders allow combined loan-to-value ratios of 80-85%, meaning total debt from both mortgages cannot exceed 80-85% of home value. For example, $400,000 home at 80% CLTV allows $320,000 total debt—if first mortgage is $250,000, you can borrow up to $70,000 second mortgage. Both loans appear as separate monthly payments. First mortgage holds senior lien position, getting paid first in foreclosure; second mortgage holds junior lien, creating higher risk and slightly higher rates. Requirements for second mortgages include 680+ credit score, debt-to-income below 43%, sufficient income to support both payments, and documented equity through appraisal. Second mortgage foreclosure doesn’t eliminate first mortgage obligation.
What are the disadvantages of a second mortgage?
Second mortgage disadvantages include two separate monthly payments increasing financial burden and budget complexity, higher interest rates than first mortgages due to junior lien position (typically 0.25-0.75% higher), foreclosure risk if you cannot maintain payments on either loan, reduced home equity cushion limiting future borrowing flexibility, and closing costs of 2-5% ($1,500-5,000 on $75,000 loan). Additional risks: if home values decline, second mortgage may become underwater while first mortgage has equity. Selling becomes complicated—both loans must be paid off from proceeds. Variable-rate second mortgages (HELOCs) carry payment increase risk. Second mortgages also complicate refinancing your first mortgage, as second lien holder must agree to subordination. Tax deductibility limited to $750,000 combined mortgage debt ($375,000 single filers).
What credit score do you need for a second mortgage?
Second mortgages require 620-680 minimum credit scores, with 700+ preferred for competitive rates and best terms. Most lenders want 680-700 for home equity loans and 680-720 for HELOCs due to higher risk of junior lien position. Scores of 740+ qualify for optimal pricing, potentially saving 0.5-1.0% compared to 680-score borrowers. Every 20-40 point improvement saves approximately 0.25-0.50% in rate. For example, on $75,000 second mortgage, 740 credit versus 680 credit saves roughly $30-60/month or $10,800-21,600 over 15 years. Credit unions sometimes approve members with 640-660 scores through relationship-based underwriting. Scores below 620 rarely qualify for second mortgages; these borrowers should consider improving credit 6-12 months or exploring alternative financing like personal loans or government programs.
How much can you borrow with a second mortgage?
Second mortgage borrowing limits depend on combined loan-to-value ratio, typically capped at 80-85% of home value minus first mortgage balance. Calculate available funds: multiply home value by 0.80-0.85, subtract first mortgage balance. For example, $500,000 home at 80% CLTV allows $400,000 total debt—with $320,000 first mortgage, you can borrow $80,000 second mortgage. Some lenders cap second mortgages at specific amounts ($250,000-500,000) regardless of equity. Actual borrowing depends on credit score (680+ required), debt-to-income ratio (below 43% with both payments included), sufficient income verification, and home appraisal. Credit unions occasionally offer 90% CLTV for established members. Investment properties typically limited to 75-80% CLTV. Larger second mortgages ($100,000+) often require 700+ credit and strong financial profiles.
Are second mortgage rates higher than first mortgage rates?
Yes, second mortgage rates typically run 0.25-0.75% higher than first mortgage rates due to increased lender risk from junior lien position. In 2026, first mortgage rates average 6.50-7.00% APR while second mortgages (home equity loans) range 7.90-8.15% APR—approximately 0.90-1.15% higher. HELOCs average 7.25-7.63% APR. Higher rates reflect foreclosure risk: if property is foreclosed, first mortgage gets paid from sale proceeds before second mortgage, potentially leaving second lien holder with losses. Rate difference narrows with excellent credit (740+) and substantial equity (30%+), potentially reducing premium to 0.25-0.50%. Despite higher rates, second mortgages often beat alternatives: personal loans (10-18% APR) or credit cards (18-25% APR). Tax deductibility partially offsets higher rates when used for home improvements.
About Bryan Dornan
Bryan Dornan is a financial journalist and mortgage industry veteran with nearly 30 years of experience as a lender, loan officer, mortgage broker, and chief marketing officer. He currently serves as Chief Editor of RefiGuide.org, where he has built one of the most trusted mortgage education platforms in the United States. Bryan has founded multiple mortgage and digital marketing companies throughout his career and remains focused on helping homeowners leverage home equity wisely while making affordable homeownership accessible to everyday Americans. Bryan's continual focus is to educate homeowners how to leverage home equity while also promoting affordable home-ownership to consumers like you across the United States. He is a licensed California Real Estate Broker DRE: #01203791. and writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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