Second Mortgage vs. Home Equity Loan: Is There a Difference?

What is a second mortgage?

A second mortgage is an additional loan taken out against your home’s equity on top of your primary mortgage. A second mortgage is sometimes called a “junior lien” because it’s a loan that’s subordinate to your first (or senior) mortgage. In case of default, the second loan is paid off after the first.

The two main types of second mortgages are:

• Home equity loans: A lump-sum loan with fixed interest rates and monthly payments.
• Home equity lines of credit (HELOCs): A revolving line of credit with variable interest rates and flexible payment terms.

What is a home equity loan?

A home equity loan allows you to borrow a fixed amount of money against your home’s equity. You receive the funds in a lump sum and repay it over a set period with fixed monthly payments. This option is ideal for large, one-time expenses, such as home improvements or debt consolidation.

​​Lenders typically follow the 80% rule, which allows you to borrow up to 80% of the home’s total value minus what you owe on your mortgage. In some cases, a lender may increase this amount to 85% or more, depending on your credit score, financial stability, the value of the property, and the specifics of the loan program.

Home equity loan example

Here’s an example of how a home equity loan works. Say your home is worth $500,000, and you still owe $250,000. In a typical scenario, the most you’d be able to borrow against the equity using the 80% rule is $150,000.

Here’s how that breaks down:

• $500,000 x .80 = $400,000
• $400,000 – $250,000 = $150,000

Below is a table illustrating what your monthly payments might be on a $150,000 home equity loan using current interest rates for equity-backed loans, which are typically higher than 30-year fixed mortgage rates.

Source: U.S. Bank home equity loan calculator (As of June 2025 with a 680-729 “good” credit score)

What is a home equity line of credit (HELOC)?

A HELOC, or home equity line of credit, functions more like a credit card. You’re given a credit limit based on your home’s equity and can draw from it as needed. Payments and interest are only due on the amount you use, making it a flexible option for ongoing expenses or emergencies.

HELOCs typically have a variable interest rate, meaning their interest rates fluctuate based on the prime rate.

HELOC example

Imagine a homeowner who wants to fund various home projects over several years. They choose a HELOC with a $50,000 limit, withdrawing funds as needed and paying interest only on the amount borrowed, with the flexibility to repay and borrow again during the draw period.

If the homeowner withdrew the entire $50,000 at a 10.270% variable annual percentage rate, the monthly payment might be around $449 on a 30-year term.

If, instead, the homeowner was approved for $150,000, as in our home equity loan example above, and withdrew the entire amount at a lower 9.32% variable annual percentage rate, the monthly payment might be around $1,242 on a 30-year term.

*Estimates created using Bank of America’s HELOC calculator

Should I get an equity-backed loan?

Deciding to leverage your home’s equity through a second mortgage, such as a home equity loan or a HELOC, can be a smart financial move. However, it’s important to weigh the benefits and risks to determine if this type of loan aligns with your financial goals and situation.

An equity-backed loan can offer access to substantial funds at relatively low interest rates compared to other types of credit. But it also means putting your home on the line.

Let’s look at some key pros and cons to help you make an informed decision.

Start Making Offers Without Waiting to Sell Your Home

Through our Buy Before You Sell program, HomeLight can help you unlock a portion of your equity upfront to put toward your next home. You can then make a strong offer on your next home with no home sale contingency.

Buy Before You Sell

Pros and cons of having a second mortgage

A second mortgage can offer benefits like access to large sums of money and flexible payments. On the flip side, it also comes with risks such as added monthly payments and possible foreclosure. Here’s a rundown of the pros and cons:

When is a home equity loan a good choice?

A home equity loan might be the right option for you if you:

• Aim to consolidate debt for a single payment: Streamline your debts into one manageable monthly payment at a potentially lower interest rate.
• Want to make major home improvements: Fund substantial renovations that can increase your home’s value.
• Need to pay for college or other education: Cover large educational expenses with predictable repayment terms.
• Know the amount you need: If you have a clear idea of the required amount, a lump sum with fixed payments is ideal.

When is a HELOC a good choice?

A HELOC could be the best fit if you need to:

• Consolidate higher-interest debt: Pay off high-interest debt with a potentially lower-rate line of credit.
• Cover ongoing revolving expenses: Flexible borrowing can help you manage ongoing costs, such as medical bills or home improvements.
• Avoid a cash-out refinance: Access your home’s equity without refinancing your primary mortgage.
• Buy an additional home: Use the line of credit for a down payment on your next house or to purchase an investment property.

Alternatives to consider beyond a second mortgage

If a second mortgage doesn’t feel like the right move, there are other options worth checking out:

• Cash-out refinance: This lets you replace your current mortgage with a bigger one and take the difference in cash. It’s a good option if you want to lower your monthly payments or roll in other debts.
• Reverse mortgages: For aging homeowners, this option allows you to pull from your home’s equity without monthly payments, helpful for covering retirement expenses.
• Home equity sharing agreement: This allows you to access a portion of your home’s equity in exchange for giving a share of your home’s future value to an investor. It can be a good option if you want cash now without taking on monthly payments.

Each option has its advantages, so your choice ultimately depends on what you need and what you’re comfortable with. Taking the time to explore your options can help you land on the best fit.

Which loan type to choose?

Choosing between a second mortgage and a home equity loan is an important financial decision that can impact your budget and long-term goals. Both options allow you to borrow against your home’s equity, but they differ in structure, interest rates, and repayment terms.

A second mortgage is often used for large, one-time expenses like home renovations or debt consolidation, while a home equity loan may be better for those who prefer manageable payments and predictable terms.

When deciding which to choose, consider factors such as your financial situation, how quickly you need the funds, and your ability to manage monthly payments. It’s also important to compare interest rates and fees to find the most affordable option.

Before applying, knowing your home’s current value is crucial because it determines how much equity you have available to borrow. Having an accurate estimate helps you make informed choices and avoid borrowing more than you can comfortably repay. Use HomeLight’s Home Value Estimator to get an estimate in under two minutes.

Header Image Source: (Pascal Bernardon/ Unsplash)