What Are the Key Differences Between Second Mortgages and Home Equity Loans?

Borrowing against home equity is a common way homeowners access cash, but the terms and risks vary considerably depending on the product. A second mortgage is an umbrella term for any loan that uses your home as collateral in addition to an existing first mortgage. Under that umbrella are two common products: home equity loans (fixed, lump-sum loans) and home equity lines of credit (HELOCs, revolving credit). Understanding the practical differences helps you match the product to your need without exposing your home to unnecessary risk.

How second mortgages and home equity loans are structured

  • Second mortgage: Any loan or lien recorded after the primary mortgage. It can be a fixed-term lump sum, a revolving line of credit, or other specialized second-lien products (stand-alone second, purchase-money second, soft second). See the FinHelp glossary entry on Second Mortgage for definitions and variations: Stand-Alone Second Mortgage and other second-lien types.

  • Home equity loan: A specific type of second mortgage that pays a single lump sum and typically has a fixed interest rate and a fixed repayment period (for example, 5–30 years). Borrowers like predictability in payments and rates, which makes these loans useful for debt consolidation, one-time large expenses, or planned renovations.

(For a side-by-side comparison with HELOCs, FinHelp has an expanded guide here: Home Equity Loan vs HELOC: Uses and Risks.)

How much you can borrow (combined loan-to-value)

Lenders set limits using combined loan-to-value (CLTV). A common threshold is 80–90% CLTV, meaning your total mortgage debt (first mortgage + second mortgage) can generally be up to 80–90% of your home’s current value. Example:

  • Home value: $400,000
  • First mortgage balance: $200,000
  • 85% CLTV allowed: $400,000 × 85% = $340,000
  • Maximum second mortgage: $340,000 − $200,000 = $140,000

Exact limits vary by lender, loan type, credit score, and market conditions. Credit unions, banks, and online lenders apply different overlays, so shop around.

Interest rates, payments, and predictability

  • Home equity loan: Mostly fixed-rate. Monthly principal-and-interest payments are predictable. This is often better when you need a known monthly budget.

  • Other second mortgages/HELOCs: May be variable (HELOCs usually are). A variable rate can start lower but may rise, increasing monthly payments and total interest paid.

From my practice advising clients, homeowners who needed a reliable monthly payment for a multi-year plan (college tuition, renovation project) often prefer a home equity loan. Those needing flexibility for ongoing expenses (contractor draws, business shortfalls) sometimes choose a HELOC or other variable second-mortgage product—accepting rate risk in exchange for draw flexibility.

Fees and closing costs

Both product families can carry: origination fees, appraisal costs, title search, recording fees, and other closing costs. Some lenders advertise “no closing costs” but may charge a higher rate or include fees in the loan balance. Always request a full Good Faith Estimate or Loan Estimate and compare total cost, not only the advertised rate.

Tax considerations (as of 2025)

The Tax Cuts and Jobs Act of 2017 limited deductibility of interest on home equity borrowing. Interest on home equity loans or HELOCs is deductible only when the loan proceeds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan, and other requirements are met (see IRS Publication 936 for current rules). For general-purpose borrowing (debt consolidation, tuition, business start-up), interest is typically not deductible unless it meets those conditions. Confirm with a tax professional; see IRS guidance: https://www.irs.gov/publications/p936 and the CFPB overview on home equity borrowing: https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-or-heloc-en-1796/.

Risks: foreclosure, second-lien priority, and market changes

A second mortgage is secured by your home. If you default on the second mortgage, the second-lien holder can pursue foreclosure. In most states, the first mortgage has priority: in a foreclosure sale the first mortgage is paid first and the second lien recovers whatever is left—this makes second-lien loans riskier for lenders and often results in higher rates. For borrowers, the main risks are:

  • Increased chance of losing your home if you can’t make payments on the first or second loan.
  • Rising payments if you have a variable-rate product.
  • Reduced future refinance or sale proceeds because you repay the second lien from proceeds.

Qualification criteria

Lenders typically require:

  • Sufficient equity (CLTV within lender limits),
  • Adequate credit score (often mid-600s or higher for best rates),
  • Stable income and acceptable debt-to-income (DTI) ratio.

In my experience preparing loan packages for clients, an up-to-date appraisal and documentation of income (pay stubs, tax returns) move an application quickly; weak credit or thin documentation leads to higher rates or denial.

When to choose each option: practical guidance

  • Choose a home equity loan if:

  • You need a fixed, one-time sum for a project or to consolidate high-interest debt.

  • You want predictable monthly payments and a set payoff timeline.

  • Choose another second-mortgage product (HELOC or variable second) if:

  • You need access to funds over time, not a single lump sum.

  • You are comfortable with rate variability and have a plan to manage rising payments.

  • Consider alternatives such as a cash-out refinance if current first-mortgage rates are low and you want a single loan rather than managing two mortgages. See FinHelp’s comparison of cash-out refinance and other home equity options: Home Equity Alternatives: HELOCs vs Home Equity Loans vs Cash-Out Refinance.

Real-world example and quick math

Case: You need $40,000 to consolidate credit-card debt and prefer steady payments.

  • Option A: Home equity loan — $40,000 at 6.00% fixed for 10 years.

  • Monthly payment ≈ $444 (principal + interest).

  • Total interest ≈ $33,280 over 10 years.

  • Option B: HELOC — variable rate starting at 5.0% with interest-only payments for 10 years, then fully amortizing later.

  • Interest-only monthly payment initially ≈ $167 ($40,000 × 5.0% ÷ 12).

  • Payments will rise once you enter amortization, and total interest depends on future rates.

These numbers are illustrative; use a lender’s amortization schedule or a financial calculator for exact figures.

Questions to ask lenders (what to compare)

  • What is the combined loan-to-value (CLTV) limit you’ll use?
  • Is the rate fixed or variable, and what indices and margins apply?
  • What are all upfront and ongoing fees, including prepayment penalties?
  • If variable, is there a rate floor or cap on increases?
  • How will the loan affect my ability to refinance or sell?

Common mistakes I see and how to avoid them

  • Borrowing without a clear repayment plan. Fix this by building a cash-flow plan and considering a shorter term if affordable.
  • Overleveraging the home with too-high CLTV. Maintain a buffer — 70–80% CLTV preserves flexibility and equity.
  • Ignoring the tax rules. Ask a CPA whether interest on the planned use of funds remains deductible under IRS rules.

Final takeaways

A home equity loan is a commonly used type of second mortgage that offers fixed payments and certainty; the broader category of second mortgages includes variable products like HELOCs and specialized second liens. Match the product to your cash-flow needs, risk tolerance, and long-term plans for the house. Always compare total costs (interest + fees), confirm tax treatment with a professional, and read lender disclosures carefully.

This article is for educational purposes only and is not individualized financial or tax advice. For advice tailored to your situation, consult a licensed financial planner or tax professional. Authoritative sources used: IRS Publication 936 (mortgage interest deduction rules) and Consumer Financial Protection Bureau guidance on home equity borrowing (CFPB).