What’s the Difference Between a Second Mortgage and Home Equity Loan?

Second mortgages, home equity loans, home equity lines of credit – what’s the difference? If you’re a homeowner and looking to borrow money by tapping into your home equity, these are just a few of the different terms you’re likely to hear, and you might be wondering what the difference is. Is there a difference between a second mortgage and a home equity loan? And how does a home equity loan differ from a home equity line of credit?
The term “second mortgage” refers to any mortgage or loan you have against your home in addition to your first mortgage. Some homeowners may choose to take out a second mortgage on their home that gives them a large lump sum of money at one time. These second mortgages can be borrowed at a fixed or adjustable rate and are paid out monthly just like the first mortgage payments.
Most home equity loans are also second mortgages, however there are exceptions. For instance, homeowners that own their home 100% outright and have paid off their mortgage completely, can still borrow against that 100% equity they own. However, in this case it would not be a second mortgage because there is no mortgage before it. Home equity loans also always adjustable rates, unlike second mortgages, which can be either fixed or adjustable.
So where does a home equity line of credit come into all of it? Home equity lines of credit, like home equity loans, also always come with an adjustable rate, but they are different in one major way. Instead of being given one lump sum, the homeowner may tap into their line of credit at any time, for any amount they want, up to the agreed-upon borrowing amount.
Now for the big question: which one do you need?
A home equity line of credit (or HELOC as they’re often called,) is usually most convenient if you need money over a long period of time, and would like to be able to take out smaller amounts whenever you want. In this way, home equity lines of credit are much like credit cards (although the two should NEVER be confused.) If however you need the money all at once, either for a major home renovation or a new car, a home equity loan, or second mortgage, is generally a better option because it gives you a large amount of cash up-front and you can choose the rate that fits you best.