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

If you have any experience with mortgages, even just by reading about them, you might have heard about home equity loans. While you might think a home equity loan is a type of mortgage, they’re not the same thing. A mortgage finances the purchase of a property. Meanwhile, a home equity loan is a second mortgage. Think of it like a mortgage on a mortgage, when a homeowner borrows the equity they’ve built in their home.

What is a mortgage?

A mortgage is the most common way to finance the purchase of a house. It’s a loan that’s repaid with interest over a period, typically 15 – 30 years. Mortgages are used by people who can’t buy a house with cash, which is most people. This financing option lets us split the cost into more affordable monthly payments.

How mortgages work

If you get a mortgage to finance a home purchase, you’re making an agreement with the lender to repay the loan with interest over an agreed-upon period. The value of a mortgage will vary based on the home buyer’s qualifications, the appraised value of the property, and the size of the down payment.

Once you close on the loan, you’ll make monthly payments on the mortgage and build equity in your home. Until the loan is completely repaid, your lender retains a mortgage lien on the property. This means that if you fall too far behind on your payments, you run the risk of losing your home.

The property will be entirely yours once you pay off the loan, though you’ll still have to pay property taxes. But you don’t have to pay off a mortgage before selling the house as long as you can sell it for enough to pay off the remaining balance of your loan.

What is a home equity loan?

Home equity loans are second mortgages that let you borrow money against your house for almost anything you need cash for. They can be taken out without changing the terms of your original mortgage because they will result in a second monthly payment. You can also take out a home equity loan if you’ve fully paid off your primary mortgage.

As you pay back your primary mortgage, you gain equity. Home equity loans use the money you’ve already invested in your property as loan collateral, and another lien will be on your property. It’s important to understand that if you default on a home equity loan, you risk foreclosure just like you would with a regular mortgage.

How home equity loans work

You can get a home equity loan for as much as 80% – 85% of your home’s value, though some lenders may allow you to borrow more in certain circumstances. The amount you can ultimately take out depends on your financial circumstances. A high credit score and high income will probably lead to a higher borrowing threshold.

To find out how much you could borrow for this type of second mortgage, you would find the percentage of your home’s value that your lender offers and subtract what you still owe on your mortgage.

So, if your home was worth $500,000 and you can borrow up to 85%, that’s $425,000. But maybe you still owe $200,000 on your mortgage. In this case, you’d likely be able to borrow up to $225,000 for home improvements, college education, or whatever else you need the money for.

The amount you borrow with a home equity loan is given to you as a lump sum. You then pay off the amount you borrowed, with interest, alongside your original mortgage. Because your home acts as collateral for the loan, your lender may be able to foreclose on your home if you default on either payment.

What is a home equity line of credit (HELOC)?

A home equity line of credit is often brought up when talking about home equity loans, but they are not the same thing. A HELOC is a line of credit taken out against your home’s equity that can be used, or not used, for almost anything.

Instead of having a set amount given to you, you instead have a maximum amount you can withdraw. You can use as much or as little as you need to during the draw period (also referred to as the borrowing period), then repay it during the repayment period. This draw period is often 5 – 10 years, while the repayment period is typically 10 – 15 years.

Rocket Mortgage® doesn’t offer HELOCs currently.

Home equity loan vs. mortgage vs. equity line of credit

Which loan is the best option to use?

The answer to many financial questions is “it depends on your situation.” Deciding between a mortgage and a home equity loan is no different. The best loan option is based on your financial situation and circumstances.

When to use a mortgage loan

If you don’t own any properties to draw equity from and don’t have the cash to buy one outright, you’ll probably have to purchase a home or an investment property with a mortgage. There are many mortgage options out there, including both fixed-rate and adjustable options. To learn more about which ones work best for your situation, talk to a mortgage lender like Rocket Mortgage.

When to use a home equity loan

If you’re paying off or have paid off a mortgage and have equity in your house, a home equity loan is a good option for cash. Because the money from a home equity loan can be used for most things, you can use it for anything from hospital bills to a new car to credit card debt consolidation. You can even use it for a down payment on an investment property. Keep in mind that if you haven’t paid off your original mortgage, you’ll be facing a second monthly payment.

When to use a HELOC

If you don’t know how much money you’re going to need, or you anticipate having to withdraw money several times, you might want to go for a HELOC. Because HELOCs are not set amounts of money but instead lines of credit available to you, they can be seen as a safety net if you’re anticipating significant expenses in the future. If you don’t end up needing that much, you won’t be burdened with a big loan and high interest rates. These can also be a good choice for people who want to take advantage of the variable interest rates they usually offer.

FAQ

You probably have more questions about the subject. Here are some commonly asked questions:

Is it cheaper to get a home equity loan or a mortgage?

It depends on the loan value and terms. Closing costs on a second mortgage are usually less than closing costs on a primary mortgage. On the other hand, primary mortgages typically have lower interest rates than second mortgages, such as home equity loans. This means home equity loans might have lower up-front costs. Still, mortgages might have a lower total cost in the long term, though the reality varies based on the situation.

Is a home equity loan different from refinancing a mortgage?

Yes, they’re different. A home equity loan is a second mortgage, meaning it’s another loan and another monthly payment. But it doesn’t change your original mortgage terms.

When you refinance a mortgage, you replace the terms of the original loan with the terms of the new refinanced mortgage. You’ll still only have one monthly payment to think about.

Can I buy property with a home equity loan?

Yes, you can use the funds from a home equity loan to buy another home. These funds can be used for the down payment, or, if the property is relatively inexpensive compared to the loan, you could buy it outright.

Can I deduct taxes on home equity loans and mortgages?

Interest on both mortgages and home equity loans can be tax-deductible if you itemize deductions. Interest on a home equity loan is a bit more complicated, though, as it may be deductible under certain circumstances and depending on the year. In the tax year 2025, the interest is only deductible if the loan is used for home improvements, though this may change in 2026.

What is a disadvantage of a home equity line of credit?

As with a home equity loan, a HELOC puts your house up as collateral. This means that you run the risk of losing your home if you fall behind on payments. And while variable interest can work to your advantage sometimes, it does mean that repayment can be unpredictable.

The bottom line: Choose the right loan option for your goals

If you want to purchase a home, especially your first home, a mortgage is likely the type of financing you will want to pursue. If you already have a home and need a substantial amount of money for a large purchase or home renovations, a home equity loan would be a good option.