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Second Mortgage vs. Home Equity Loan: Understanding the Difference

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

Amy Fontinelle Amy Fontinelle Edited by Chris Jennings Updated October 13, 2021

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. By refinancing your mortgage, total finance charges may be higher over the life of the loan.
Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."

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.

Here’s what else you need to know about second mortgages and home equity loans:

  • What is a second mortgage?
  • What is a home equity loan?
  • An alternative to second mortgages

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 up front 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 loanHome equity line of credit (HELOC)
Second mortgageYesYes

DisbursementCash up front in one lump sumDraw cash as needed, up to limit
RepaymentFixed monthly paymentsOpen-ended. Interest-only payments often allowed during draw period
Interest rateTypically fixedUsually variable
Interest chargesInterest charges apply to entire loan balanceOnly pay interest on amount you draw

Check out: Should You Get a Home Equity Loan for Debt Consolidation?

An alternative to second mortgages

One alternative to a second mortgage is a cash-out refinance. With a cash-out refi, you pay off your existing mortgage with a new, larger mortgage and pocket the difference.

Tip: You can use the cash from a cash-out refinance however you want, just like you can with a home equity loan or line of credit. Like those options, you’ll need to have 20% equity left after the cash-out refinance unless you’re willing to pay private mortgage insurance.

The biggest benefit to choosing a cash-out refinance over a second mortgage is that cash-out refinance rates tend to be lower. This is because a cash-out refi is a first mortgage. The biggest drawback is that since you’ll be getting a larger loan, your closing costs, particularly the origination fee, may be higher.

Credible doesn’t offer home equity loans or HELOCs, but we can help you compare the latest mortgage refinance rates, including those for a cash-out refinance. In just a few minutes, you can get actual personalized rates from our partner lenders — it’s free, and you don’t even have to leave our platform.

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Keep reading:

  • Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose
  • Fixed-Rate HELOCs: A Cross Between HELOCs and Home Equity Loans
About the author
Amy Fontinelle
Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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Home » All » Mortgages » Second Mortgage vs. Home Equity Loan

Home Equity Guide


  • What Is Home Equity
  • Home Equity Loans
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  • Cash-Out Refinance
  • Reverse Mortgages
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Understand Your Options

  • Pros and Cons of Second Mortgages
  • Home Equity Loan & HELOC Requirements
  • HELOC vs. Home Equity Loan
  • Cash-Out Refi vs. Home Equity Loan
  • Bad Credit Home Equity Loans

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