Second mortgage vs. home equity loan: What's a better option?

An owned home does more than just provide shelter. It can build wealth with every mortgage payment. When you need extra cash for a major expense or emergency, this built-up equity can be a financial secret weapon.

Second mortgages let you tap into a home’s value without selling it. Home equity loans are a specific type of second mortgage that give you a one-time lump sum of money, while a home equity line of credit (or HELOC) is another that gives you a revolving line of credit. Both can be  lifesavers — but these options aren’t for everyone.

Here’s a guide to the nuances of second mortgages versus home equity loans and if they’re a good fit for your financial goals.

What’s a second mortgage on a home?

As the name suggests, a second mortgage is an additional mortgage loan you take out while you still have your first one. It lets you borrow against the equity you've built up in a property without touching the original mortgage terms.

The difference between a first and second mortgage is all about who gets paid first if things don't work out as expected. If a borrower defaults and their home goes into foreclosure, the primary mortgage lender gets paid out before the second mortgage lender. This extra risk for the lender typically means higher interest rates on second mortgages compared to primary home loans.

There are two main types of second mortgages: home equity loans, which give you a lump sum upfront, and HELOCs, which work more like a credit card you can draw from as needed. With either option, you add another monthly payment to your budget alongside your existing mortgage — which means second mortgages are big commitments that require foresight and reliable income.

What’s a home equity loan?

A home equity loan lets you cash in on the value you've built up in your property over time. Think of it as borrowing from yourself. You gain access to the portion of your home you own outright. These loans are great for one-off big expenses when you know exactly how much money you need upfront, like a major kitchen renovation or college tuition.

Here's how it works: You get a single lump sum of money you pay back over time — similar to your original mortgage, but typically with a shorter term. Most home equity loans have fixed interest rates, which means predictable monthly payments that stay the same for the entire loan period (usually 5-30 years).

Lenders typically let you borrow up to 80% of your home's current value minus what you still owe on your primary mortgage. Some lenders may let you take a little more if you have a very good credit history.

If those features don’t suit your needs, Better offers a flexible HELOC alternative that also gives you access to your home's equity without replacing your existing mortgage. You can get up to $500,000 and receive your funds in as little as 7 days — and you can apply in minutes.

....in as little as 3 minutes – no credit impact

Second mortgage vs. home equity loan

So, what’s the difference between a second mortgage and a home equity loan? Here's the simple explanation: When you already have a primary mortgage and take out a home equity loan, that loan becomes your second mortgage.

Not all second mortgages are home equity loans. The term “second mortgage” covers any loan secured by your property that comes after your primary mortgage. This category includes both home equity loans and HELOCs.

The more important distinction to understand is between home equity loans and HELOCs. Home equity loans make funds available from the outset, with a fixed interest rate and monthly payments that don't change. HELOCs work more like a credit card secured by your home. You get a revolving line of credit with a variable interest rate that you can tap into during the draw period, during which you only have to pay interest. In the repayment period that follows the draw period, you make monthly payments toward both the interest and the principal of your loan, just like a home equity loan.

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Looking for more flexibility than a traditional home equity loan offers? Better's HELOC gives you the freedom to borrow only what you need, when you need it. Unlike a one-time lump sum loan, Better's revolving credit line lets you access funds as your needs change, with the flexibility to draw and repay multiple times during your draw period. The best part? You can apply to check your eligibility in just 3 minutes.

....in as little as 3 minutes – no credit impact

Second mortgage pros and cons

All second mortgages share some common advantages and disadvantages. Here's what to weigh to figure out if a second mortgage is a good idea.

Second mortgage pros

• Potential access to large funds: Second mortgages let you tap into the home equity you've built, offering access to much larger amounts than you could get through personal loans or credit cards.

• Better rates than many alternatives: Because your home serves as collateral, lenders typically offer lower interest rates than you'd find with credit cards or unsecured personal loans, potentially saving you thousands in interest.

• Possible tax advantages: In certain situations, the interest you pay on a second mortgage might be tax-deductible, especially when used for home improvements. Check with a tax professional to make sure this is the case for you. 

• Intact primary mortgage: You won't have to refinance or change the terms of your original mortgage, which is particularly valuable if you already have a great interest rate locked in.

Second mortgage cons

• Another payment to manage: Taking on a second mortgage means adding another monthly bill to your budget, which can strain your finances if the situation changes.

• Upfront costs: Like a first mortgage, second mortgages often come with closing costs and other fees that can add up.

• Higher rates than primary mortgages: While cheaper than credit cards, second mortgages typically charge higher interest rates than primary mortgages since lenders take on more risk.

Home equity loan pros and cons

Which is better: a home equity loan or a second mortgage? As a specific type of second mortgage, home equity loans share the same general advantages and disadvantages as second mortgages in general — but they also have some unique characteristics that set them apart from other options like HELOCs.

Home equity loan pros

• Predictable payments: With fixed interest rates, your monthly payment stays the same for the entire repayment period, simplifying long-term budgeting and financial planning.

• One-time lump sum: If you know exactly how much money you need for a specific project or expense, a home equity loan offers all the funds upfront without needing to draw more later.

• Budget-friendly stability: The combination of fixed rates and consistent payments means no surprises down the road, unlike other borrowing options where costs can fluctuate.

Home equity loan cons

• Equity requirements: You need to have built up sufficient equity in your home to qualify — usually at least 15 to 20% of your home's value.

• Closing costs and fees: Like other mortgages, home equity loans may come with appraisal fees, origination fees, and other closing costs that reduce the actual amount you receive.

• No flexibility after closing: Once you get your lump sum, that's it. If your project ends up costing more than expected, you can't just borrow a little more without applying for another loan.

When is a home equity line of credit a better option?

A home equity line of credit is a second mortgage that shines in situations where a traditional home equity loan falls short. Consider choosing a HELOC when:

• You face expenses that will come in waves rather than all at once, like multi-year college tuition payments or a home renovation with several phases.

• You're unsure of the exact amount needed.

• You want lower upfront costs. HELOCs typically have fewer closing costs than traditional home equity loans, making them more economical if you're not certain you'll use the full credit limit.

If any of these match your financial needs, a HELOC might be a good choice. Just keep in mind the trade-off that having a variable interest rate with a HELOC means payments could potentially increase if market rates rise (or decrease if they fall).

Unlock your home's equity with Better

Your home's equity can be a financial lifeline when life's big expenses come calling. And both home equity loans and HELOCs let you tap into the value you've built in your property. The right choice depends on your specific needs, whether that's fixed payments and a single sum or flexible access to funds as expenses arise.

Better makes accessing your home's equity simple with an easy HELOC application that takes just minutes to complete. Get pre-approved in as little as 3 minutes and start putting your home's value to work.

....in as little as 3 minutes – no credit impact