Make an informed decision on your home financing. Learn the differences between a second mortgage and a home equity loan
The terms home equity loan and second mortgage are often used interchangeably. But are the two actually the same thing?
Well, yes and no.
More accurately, home equity loans are a type of second mortgage, with home equity lines of credit (or HELOCs) being another common variety. A second mortgage, however, refers to a lien –– the legal claim against an asset –– taken out on a property with an existing mortgage.1 This means that should you default on your second mortgage, your lender can send your home into foreclosure even if you’re current on your primary mortgage. Compared to your primary mortgage, your second mortgage will almost always be smaller, considering the loan you’re taking out is against only the equity you have accrued rather than the full property value.
While second mortgages and home equity loans may be two sides of the same coin, it’s still worth delving into the different varieties of second mortgages –– shedding light on their differences, mechanics, advantages, and limitations. By the end of this article, you should have a clearer understanding of which option might be best suited for your financial needs and a definitive answer in the second mortgage vs. home equity loan discussion.
If this is the first you’re hearing of a home equity loan or second mortgage, the concept may seem foreign. Being able to transform your home's equity into a valuable financial resource without selling your home and downsizing? It might seem contradictory, but this is, in essence, exactly how a second mortgage works. With a second mortgage, you can borrow against the equity you've built up in your home, allowing you to access funds to apply toward home improvement projects, college funds, investments, debt consolidation, travel, or virtually any other purpose you can imagine.
As mentioned earlier, there are two primary types of second mortgages: home equity loans and home equity lines of credit. But while home equity loans and HELOCs are both types of second mortgages, their differences are worth noting. Home equity loans work by providing homeowners with a lump sum payment, typically at a fixed interest rate, potentially making it easier to plan for regular monthly payments over a set period. HELOCs, on the other hand, function more like a credit card –– giving you a credit line from which you can borrow as needed throughout an established draw period before repaying your loan.
This repayment period is perhaps the most notable factor to consider when researching second mortgages and home equity loans, as your chosen loan product will significantly impact the repayment process. With a home equity loan, your monthly payment is fixed over a set period, determined by your interest rate and the amount of equity you decide to take out. But with a home equity line of credit, your interest rate will likely be variable with a multi-phase repayment period, which can lead to some unexpectedly large monthly payments. Discover more on a HELOC vs. home equity loan in our guide.
Given the predictability that stems from a fixed interest rate and unchanging monthly payments, home equity loans are the popular choice for homeowners seeking a clear-cut, one-time infusion of funds. Home equity loans are in much higher demand now than they have been in recent years, as homeowners look for ways to combat the effects of inflation.2 In fact, some even use a home equity loan to pay off debt. But just because home equity loans are the popular choice doesn’t mean they’re always the right one, and understanding the finer details of how these loans work is crucial.
To access home equity via a home equity loan, homeowners complete an application much like they would with a primary mortgage. If approved, you’ll have the opportunity to borrow against your available home equity –– and then use this equity however you see fit. As a second mortgage, the application process for a home equity loan is quite similar to that of a primary mortgage, with potential lenders assessing your creditworthiness and financial stability before approving the loan. In this case, however, lenders will also ask that you provide information about your home's value, the amount of equity you have, and details about the mortgage itself to process your application.
Once approved, you will receive a lump sum, and your repayment process begins as it would with any loan. But unlike your primary mortgage, a home equity loan is secured against the property. Meaning: If you fail to make regular payments and end up defaulting on the loan, the lender can take action to recover their funds, potentially leading to foreclosure. Despite all the benefits of a home equity loan, this risk is often too great for some homeowners. But as we will discuss later, there are other, safer ways to access your home equity.
Whether you choose to pursue a home equity loan or a home equity line of credit, the decision to take out a second mortgage should be driven entirely by your short- and long-term financial goals and your current circumstances. Below are a few instances where a second mortgage loan might be the right choice.
When used wisely, your home equity can help you improve your home’s value, achieve your goals, and even finance the education you’ve always dreamed of. But for every advantage that comes with accessing your home equity via a second mortgage there is an equal –– or even greater –– potential disadvantage. As discussed above, the obvious advantages include the possibility of lower interest rates compared to personal loans and credit cards. A surprising advantage of a second mortgage, however, is that the interest you pay on a home equity loan might be tax-deductible, depending on your financial situation and the laws in your area.4 Is a home equity loan tax deductible? Learn more in our guide.
The limitations, on the other hand, include adding to your debt load by borrowing against your home equity: the product of years or even decades of on-time payments and hard work. Most crucially, however, is the risk you assume by leveraging a second mortgage. Given that this second mortgage is secured by your home, failure to make on-time payments could send your property into foreclosure –– regardless of your current standing on your primary mortgage. Depending on your circumstances, these limitations might far outweigh the advantages, making it all the more crucial that you carefully weigh the pros and cons before inking an agreement on a home equity loan or home equity line of credit.
We’ve outlined the risks, benefits, and possibilities associated with second mortgages, but ultimately it’s up to you to decide if this financial tool is right for you. So, as you ponder this question, consider the following:
Second mortgages –– be they in the form of a home equity loan or home equity line of credit –– allow homeowners to leverage their home equity to accomplish major financial and personal goals. And while these financial tools each come with their fair share of risks, you can navigate these by carefully weighing the advantages, disadvantages, and your own personal circumstances before making a decision. But if you feel that a second mortgage still doesn’t align with your goals, or if the risks simply aren’t worth it, you might discover that Truehold’s sale-leaseback is the perfect fit.
Whereas a second mortgage allows you to borrow your home equity, and then repay it plus interest over the next decade or two, Truehold’s sale-leaseback puts your equity in your hands –– free and clear. By selling your home to Truehold, you unlock your home equity to be used however you please. And rather than a traditional sale, you can continue living in your home while paying market rent. Stay a few months while you look for something new, or settle in and stay a while. It’s entirely up to you.
Whether you want to comparison-shop second mortgage rates and Truehold’s sale-leaseback or get a cash offer on your home in under 48 hours, download our info kit to take the first step toward unlocking your home equity.
1. Rocket Mortgage. What Is a Second Mortgage and How Does it Work? https://www.rocketmortgage.com/learn/second-mortgage
2. USA Today. Home equity line of credit and home equity loans: ‘Right tool at the right time’. https://www.usatoday.com/story/money/2022/11/10/home-equity-line-credit-applications-surged/7999537001/
3. Bankrate. Bankrate’s 2023 annual emergency savings report. https://www.bankrate.com/banking/savings/emergency-savings-report/#key-stats
4. Rocket Mortgage. Can You Decuct Second Mortgage Interest On Your Taxes? https://www.rocketmortgage.com/learn/can-you-deduct-second-mortgage-interest
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