Second mortgage vs. home equity loans

This article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer home equity loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.

Quick insights

• Home equity loans are a type of second mortgage.
• Second mortgages allow homeowners with enough equity in their home to tap into that value through a number of lending solutions.
• While home equity loans allow homeowners to tap into equity, opening the loan results in another mortgage payment to keep up with.

If you’re a homeowner with equity and are considering ways to tap into that value, you’ll likely come across both second mortgages and home equity loans. Technically, a home equity loan is a type of second mortgage, as is a home equity line of credit (HELOC).

This guide explores the similarities and differences between second mortgages and home equity loans.

What’s the difference between a second mortgage and home equity loan?

A home equity loan falls under the umbrella of a second mortgage. But not all second mortgage options are home equity loans.

What is a second mortgage?

A second mortgage is any loan collateralized by a home that currently has a mortgage. A second mortgage is subordinate to the first mortgage. This means it has a second lien position. Home equity loans and HELOCs are product types; if the homeowner has paid off the house (no pending mortgage), then the borrowed home equity loan or HELOC become the first lien.

A second mortgage takes the “junior lien” position. With that, if you were not able to keep up with the mortgage and the creditors sold the home, the initial mortgage lenders would be repaid before the second mortgage. That’s why second mortgages are viewed as slightly riskier for lenders.ec-second-mortgage-junior-lien

What is a home equity loan?

A home equity loan is a type of second mortgage. It involves receiving a lump sum upfront, which the borrower repays in regularly scheduled payments over a predetermined loan term.

If you have a balance on your initial mortgage, you’ll continue to make payments on that loan. Ultimately, a home equity loan can lead to having two mortgage payments for the same property.

To obtain a home equity loan, you’ll need to have sufficient equity in your property. Lenders typically require that you have at least 20% equity in your home, which is calculated as the difference between the current market value of your home and the outstanding balance on your loan. Beyond equity, you’ll also need enough income to support the loan and meet any other requirements set by the lender.

Types of second mortgages

Second mortgages may include:

• Home equity loans: A home equity loan comes with a lump-sum payment that homeowners repay over time. These types of loans typically have a fixed interest rate attached.
• Home equity lines of credit: HELOCs offer homeowners a revolving line of credit to tap into on an as-needed basis. Typically, HELOCs come with a variable interest rate, a draw period and a repayment period.

If you still have an outstanding primary mortgage, a home equity loan or HELOC will take a second lien position; however, if your primary mortgage is fully paid off with no other associated debt, the home equity loan or HELOC may become the first lien on your home.)

With any type of second mortgage, the amount you can borrow varies based the lender’s requirements, your financial situation and how much equity you have in the home.

Home equity loan pros and cons

As with every financial product, home equity loans come with advantages and disadvantages.

Pros:

• Unlock your home’s equity: If you’ve built up significant equity and have a cash flow issue, tapping into your home’s equity can help pay for a range of expenses. For example, you may tackle a home repair or consolidate debt.
• Lower interest rates possible: This type of financing typically comes with lower interest rates, compared to other types of non-mortgage-related financing, because your home acts as collateral.

Cons:

• Increased debt burden: When you pull equity from your home, you’ll face a second mortgage payment. Adding a new debt payment is important to account for when planning and budgeting.
• Risk of foreclosure: If you can’t keep up with the home equity loan payments, the lender may foreclose on your property.

When does a home equity loan make sense?

You can use a home equity loan for almost any reason. Some common uses of home equity loan funds include:

• Covering home repairs
• Paying for higher education
• Consolidating debt
• Updating your home
• Purchasing another home

Although you can use the funds from a home equity loan for almost any reason, you’ll need to consider your financial goals and current budget to determine if a home equity loan makes sense.

If you’re currently struggling to make ends meet, adding another debt payment to the mix may not resolve the situation. But if you find the relatively low interest rates attractive and you need to cover a major purchase, a home equity loan could make sense.

FAQs

Is a home equity loan the same as a second mortgage?

A home equity loan is a type of second mortgage, but other types of second mortgages exist.

How is a $50,000 home equity loan different from a $50,000 home equity line of credit?

When you take out a $50,000 home equity loan, you’ll receive a lump-sum payment of $50,000 upfront. When you open a $50,000 HELOC, you’ll have access to borrow funds on an as-needed basis, up to $50,000.

What is the monthly payment on a $100,000 home equity loan?

The monthly payment on a $100,000 home equity loan varies based on the interest rate and loan term. But if the loan term is 15 years and the interest rate is 7.65%, the homeowner may face an estimated monthly payment of about $936, subject to additional costs and fees. Additionally, home equity loans come with closing costs that you’ll often pay upfront.

Do second mortgages have closing costs?

Generally, second mortgages—like HELOCs and home equity loans—come with closing costs, which may include between 2–5% of the loan amount.ec-pros-cons-heloans

In summary

All home equity loans are considered second mortgages. But when considering a second mortgage, a home equity loan isn’t your only option. You can also look at HELOCs to tap into your home equity.