Is a Home Equity Loan the Same as a Second Mortgage?

A home equity loan is a type of second mortgage that lets you borrow against your home’s value.

There’s some confusion surrounding the terms “second mortgage” and “home equity loan.” So, let’s be clear: A home equity loan is a type of second mortgage. But that’s not all you should know.

Many homeowners have built up equity in their houses over the years as they pay down their mortgages This equity represents a valuable asset that can be tapped through financing vehicles like home equity loans and second mortgages. But is a home equity loan the same thing as a second mortgage? Let’s take a closer look.

What is Home Equity?

Before diving into the specifics of home equity loans and second mortgages it helps to understand what home equity is.

Home equity is calculated by taking the current market value of your home and subtracting any outstanding mortgage debt and liens tied to the property

For example:

Your home is worth $300,000
You owe $180,000 on your mortgage
Your home equity is $300,000 – $180,000 = $120,000

The more of your mortgage you pay off over time, the more equity you’ll accumulate in the home. Making improvements that boost the home’s value can also increase your equity stake.

Home equity represents a real financial asset for homeowners. It can be tapped in different ways when cash is needed for things like home repairs, debt consolidation, college tuition, or other major expenses.

What is a Home Equity Loan?

A home equity loan leverages the equity built up in your home to provide funds upfront in a lump sum.

With a home equity loan:

You receive the full loan amount at closing
The loan has a fixed interest rate and a set repayment term
You pay it back in fixed monthly installments like a regular mortgage

Home equity loans are typically secured by your home, meaning the house serves as collateral. The lender can seize the home through foreclosure if you default on the loan.

You can generally borrow up to 80-85% of your home equity with this type of financing. So if you have $100,000 in equity, you may qualify for a home equity loan up to $80,000-85,000.

What is a Second Mortgage?

A second mortgage is a separate loan that is subordinate to your existing first mortgage. Your primary mortgage used to purchase the home is usually considered the first mortgage.

The second mortgage also uses your home as collateral, carrying a higher interest rate than first mortgages. This compensates the lender for the increased risk of assuming a junior lien position.

If you default, the first mortgage lender gets paid before the second mortgage holder. The second mortgage lender risks losing out on repayment if the home’s value isn’t enough to cover both loans.

Second mortgages can be structured as fixed-rate installment loans or as lines of credit with flexible draw periods. In most cases, a home equity loan is a form of closed-end second mortgage.

Key Differences

While they are similar in many ways, there are some key differences between home equity loans and second mortgages:

Loan structure – A home equity loan provides a lump sum while a second mortgage can be structured as an installment loan or revolving line of credit.
Interest rates – Home equity loans tend to have fixed rates while second mortgages can have fixed or variable rates.
Payback terms – Home equity loans have set repayment periods ranging from 5-30 years. Lines of credit have draw and repayment phases with more flexibility.
Risks – A closed home equity loan carries less temptation to accumulate debt compared to a HELOC.

Are They the Same Thing?

Given the differences above, it’s clear these financing options are not exactly the same. However, there is overlap in how they are commonly used.

In many cases, a home equity loan is essentially a form of closed-end second mortgage. Both allow you to leverage home equity. They represent secondary loans subordinate to the original mortgage used to buy the house.

So while there are technical differences, home equity loans and second mortgages can often be used interchangeably when discussing tapped home equity. The terms describe similar secondary financing types that occupy a junior lien position behind the first mortgage.

Which Option is Right for You?

If you’re considering tapping your home equity, deciding between a home equity loan and HELOC second mortgage often comes down to your financial needs and repayment abilities.

Here are some examples of when each option may be preferable:

Home Equity Loan

Paying off high-interest credit card debt
Funding a major one-time expense like a wedding
Making large-scale home improvements
Debt consolidation with predictable monthly payments

HELOC

Completing a series of home repairs over time
Paying college tuition a semester at a time
Managing frequent unexpected expenses
Handling fluctuating cash flow needs

Consulting with a financial advisor can provide guidance on whether it makes sense to tap your home equity and through what method. They can assess your specific situation and long-term goals to offer personalized advice.

Weighing the Pros and Cons

Like any financing decision, home equity loans and second mortgages carry pros, cons, and risks to weigh:

Potential Pros

Access large amounts of cash available in home equity
May offer better rates than credit cards or personal loans
Interest may be tax deductible (restrictions apply)

Potential Cons

Put your home at risk if payments aren’t made
Higher total costs over time compared to paying cash
Monthly housing costs increase with another payment

Risks

Potential for foreclosure if loan defaults
Accumulating more debt than can be managed
Housing market downturns can eliminate equity

As with any major borrowing decision, proceed with caution and carefully consider all alternatives and risks first. Your home is likely your most valuable asset, so make wise choices when leveraging home equity.

The Bottom Line

While similar, home equity loans and second mortgages are not exactly equal. But in most situations, a home equity loan can be viewed as a type of closed-end second mortgage. They offer different options for tapping accumulated home equity for financial needs.

Weigh the pros and cons carefully for your situation if considering a home equity loan or second mortgage. A financial advisor can provide guidance specific to your circumstances. Managing home equity wisely is key to maintaining your financial health and the investment value stored in your property.

is home equity loan the same as a second mortgage

What is a second mortgage?

A second mortgage is another home loan taken out against an already mortgaged property. They are usually smaller than a first mortgage.

The two most common types of second mortgages are home equity loans and home equity lines of credit (HELOC).

Like a first mortgage, your home is used as collateral for a second mortgage. Should a foreclosure happen, the first mortgage lender is first in line to get repaid. The second mortgage lender is repaid next.

Good to know:

Since second mortgages are riskier for the lender, interest rates on them tend to be a bit higher than interest rates on first mortgages.

What is a home equity loan?

A home equity loan is a type of second mortgage that lets you borrow against your home’s value. You’ll get the proceeds from a home equity loan in a lump sum — similar to a personal loan — and the loan’s interest rate will be fixed.

By contrast, a HELOC allows you to borrow smaller sums as needed, and the interest rate is usually variable. Traditionally, you’ll need to retain 20% equity in your home to qualify for a home equity loan.

Here’s an example of how someone could access their equity through a home equity loan:

Home value: $250,000
Mortgage balance: $150,000 or 60% of the home’s value
Equity to retain: 20% or $50,000
Equity available to borrow: 20% or $50,000

Tip:

Some lenders might allow you to retain as little as 10% equity when you take out a second mortgage, but they might also require you to pay for private mortgage insurance or charge you a higher interest rate.

While a home equity loan would give you $50,000 upfront in the above example, a HELOC would give you access to a $50,000 line of credit. You might never borrow the full $50,000, and you’ll only pay interest on the amounts you actually borrow.

Here are the most important differences between a home equity loan and HELOC:

Home equity loan	Home equity line of credit (HELOC)
Second mortgage	Yes	Yes
Disbursement	Cash up front in one lump sum	Draw cash as needed, up to limit
Repayment	Fixed monthly payments	Open-ended. Interest-only payments often allowed during draw period
Interest rate	Typically fixed	Usually variable
Interest charges	Interest charges apply to entire loan balance	Only pay interest on amount you draw

HELOC Vs Home Equity Loan: Which is Better?

FAQ

Is second mortgage the same as home equity loan?

Whether you call it a second mortgage or a home equity loan, it means the same thing. Withdrawing from your equity can put cash in your hand when you need it. But consider what the cost will be (be mindful of both interest rates and repayment terms) and how having two mortgages can affect your monthly budget.

What is a second mortgage on a house called?

Home equity loans and home equity lines of credit (HELOCs) are common examples of second mortgages.

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

A mortgage is used to purchase the property, while a home equity loan taps the equity in that property for various expenses. Compared to other forms of credit, both a mortgage and a home equity loan tend to offer lower interest rates on larger loan amounts.

Is a second mortgage the same as a line of credit?

Key Points. A HELOC is a credit line—much like a credit card—with variable interest rates, and you only owe what you draw from it. With a second mortgage, you’re sent the money upon closing, and payments begin immediately.

What are the different types of second mortgages?

The most common types of second mortgages are home equity loans and home equity lines of credit (HELOCs). Both allow you to borrow against your home’s equity, but they work very differently. In most cases, a home equity loan is a fixed-rate second mortgage.

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

In summary, a mortgage is primarily for home purchase, while a home equity loan allows you to tap into the equity you’ve already invested in your home for other financial needs .If you have further questions,

What does equity mean on a second mortgage?

Equity refers to the amount of the home you own outright; in other words, the difference between the value of your home and the remaining balance on your first mortgage. Common examples of second mortgages include a home equity loan and a home equity line of credit (HELOC). These two are the ways homeowners typically access their equity stake.

Can you get a second mortgage if you have equity?

When you have sufficient equity in your house, you might choose to tap into those funds. Second mortgages, which include home equity loans, offer a solution for getting your hands on the funds you need. While a home equity loan is a type of second mortgage, a second mortgage is not just a home equity loan.