Key takeaways

  • A second mortgage is a home-secured loan taken out while the original, or first, mortgage is still being repaid.
  • Like the first mortgage, the second mortgage uses your property as collateral.
  • A home equity loan and a home equity line of credit (HELOC) are two common types of secondary mortgages.
  • You must have built up a certain amount of equity (outright ownership stake) in your home to borrow against it, and you must maintain a minimum amount of equity in the home.

Since early 2020, the cost to buy a home in the U.S. has skyrocketed, reaching record highs. Though prices have cooled a bit recently, many homeowners still have significant equity in their homes as a result of the runup. The average U.S. mortgage-owning homeowner now possesses nearly $290,000 in equity as of Q2 2023— up from $182,000 before the pandemic, according to property information and data analyst CoreLogic.

One of the ways homeowners can tap their equity for ready money is by taking out a second mortgage — so-called because it uses the home as collateral for the debt, just as the original mortgage used to buy the home does.

Before you can take equity from your home, you first need to understand your options. Let’s look more deeply into how second mortgages work.

What is a second mortgage?

When you take out a second mortgage loan, you borrow against the equity you’ve built up in your home. Equity refers to the amount of the home you own outright; in other words, the difference between the value of your home and the remaining balance on your first mortgage.

Common examples of second mortgages include a home equity loan and a home equity line of credit (HELOC). These two are the ways homeowners typically access their equity stake.

You can use funds from a second mortgage for a variety of purposes. Some of the most common uses of second mortgage loans include consolidating other debts (especially high-interest credit card balances) and financing home improvements or repairs.

How does a second mortgage work?

A second mortgage works a lot like a first mortgage — in the opening stages, anyway.

To obtain a second mortgage, you typically need to do the same things you did to qualify for a primary mortgage. The process includes submitting an application to a lender and providing documentation regarding your income, debts and assets. You might also need to get an appraisal to confirm the current value of your home.

Qualifications for second mortgages vary, but many lenders prefer that you have at least 15 percent to 20 percent equity in your home. You can typically borrow up to 85 percent of your home’s value, minus your current mortgage debts. If you have a home worth $300,000 and $200,000 remaining on your first mortgage, for instance, you might be able to borrow as much as $55,000 through a second mortgage: ($300,000 x 0.85) – $200,000.

Requirements for applying for a second mortgage

To apply for a second mortgage, you must meet the following requirements:

  • Own at least 15 to 20% of the home outright
  • Have a remaining balance on your current mortgage that’s less than 85% of the home’s value
  • Have a credit score of 600 or higher (recommended)

What are the pros and cons of getting a second mortgage?

Second mortgages can be helpful in a variety of situations, but they do have drawbacks to consider.

Pros

  • Access your equity. Their home is one of the most valuable assets most Americans have. A second mortgage lets you turn that (usually) illiquid asset into usable cash. You’re funding yourself, so to speak.
  • Low interest rates. While higher than a purchase mortgage, a second mortgage boasts some of the lowest interest rates available — lower than personal loans and credit cards.
  • Multiple options for withdrawing funds. Depending on the exact vehicle, you can opt to receive money in a lump sum (the home equity loan) or draw gradually against it (the home equity line of credit).
  • Tax advantages. If used for home-related improvements or repairs, second mortgage interest can be tax-deductible.

Cons

  • Lengthy, expensive application. Applying for a second mortgage loan is a lot like applying for the first. It may take a while to get approval, and you’ll incur closing costs, too.
  • Limits on loan size. The amount you can borrow is circumscribed by how much of your home you own outright.
  • A new monthly payment. Getting a second mortgage means adding another monthly obligation to your budget.
  • Puts your home at risk. Borrowing against your home means you’ll be putting it on the line; if you can’t make payments, you could lose it.

Types of second mortgages

Borrowers who wish to take out second mortgages can choose between two basic types: home equity loans or home equity lines of credit.

Home equity loan

A home equity loan has the most parallels with a first mortgage. You receive all of the money upfront and pay it back over time with interest in fixed monthly payments. This makes these loans ideal for situations where you need a sum of cash at one time, such as paying off a big debt or paying for one large single expense, like a kitchen renovation or a new swimming pool.

Before applying, do some research into current home equity loan rates. Typically, rates are a few percentage points higher than mortgage rates. Bankrate’s home equity loan calculator can help you see if such a loan makes sense for you, and how much money you could tap.

Home equity line of credit (HELOC)

A HELOC is a line of credit, similar to a big credit card. Once it’s established, you can draw on it over several years, as often as you want and in the amounts that you want. You’re charged interest only on the amount that you actually withdraw. You can repay the sums you borrow, then borrow again.

HELOCs can be a great option if you’re not sure exactly how much money you’ll need or if you’ll need it over a long period of time. Examples may include paying college tuition or embarking on a remodeling project — like a home addition — that’ll take a good many months and whose contractors will be reimbursed in stages. Others may choose to use the money to establish an emergency fund, though this isn’t always the best recommended use.

HELOC interest rates are usually variable. That means they can rise and fall with interest rates in general. Like home equity loans, they’re typically a few percentage points higher than mortgage rates. They used to be lower than home equity loans, but the gap has closed in the last year. Our HELOC payoff calculator to see if this option makes sense for you.

What’s the difference between a second mortgage and a refinance?

Refinancing your mortgage is quite different from getting a second mortgage.

The most significant difference is that a second mortgage, like a home equity loan or HELOC, is a brand-new loan that you get in addition to your existing mortgage. Refinancing a mortgage replaces it entirely: You’ll pay off your old loan with the proceeds from the new one. However, there’s a particular type of refinancing that allows you to tap your home equity, too: a cash-out refinance.

With a cash-out refi, you take out a new mortgage with a bigger balance than your current mortgage, pocketing the difference in cash. The extra amount is based on the value of your home equity. Of course, this move leaves you with a bigger loan to pay off, and larger payments (usually fixed) to make each month.

Cash-out refinance funds and home equity loan funds can be used for similar reasons (since the refis take longer to obtain, they may not be as good for emergency expenses, though). Refinancing can be a good choice if, in addition to obtaining cash, you want to adjust the repayment term of your existing mortgage or can secure a lower interest rate on the new loan. In contrast, home equity loans or HELOCs would be the better option if you want to hang onto your current mortgage’s low-low rate, or unsure of how long or how much money you’ll need. They do work best if you own a good chunk of your home free and clear, since your outstanding mortgage balance will impact how big a loan you can get. If you still owe a lot, the refi might be the better scenario after all.

Mortgage
If you use a second mortgage to buy, build, or substantially improve the home you use to secure the loan, the interest may be tax-deductible, provided you itemize deductions on your tax return.

Final word on second mortgages

The best reason to get a second mortgage is a project that will increase the worth and ultimate market value of your home via a remodel, renovation or expansion. By investing in your property, you’re using home equity to build more equity, in effect.

Using the second mortgage to pay off other loans or outstanding credit card balances is arguably another good reason — especially if those obligations carry a higher interest rate. Replacing more expensive debt with cheaper debt can be a smart financial strategy.

However, if you’re thinking about getting a second mortgage to buy a car, pay for a vacation or purchase luxuries, think twice. Do you really want to risk your home for discretionary spending?

Second mortgage FAQ

  • Both home equity loans and HELOCs are considered second mortgages, as they are secured by a lien on your home.
  • Second mortgage rates are likely to be higher than primary mortgage rates. For example, in late November 2023,, the current average 30-year fixed mortgage interest rate was 7.81 percent, vs. 8.95 percent for the average home equity loan and 10.02 percent for the average HELOC. The disparity is due partly to the loans’ terms (second mortgages’ repayment periods tend to be shorter, usually 20 years), and partly due to the lender’s risk:  Should your home fall into foreclosure, the lender with the second mortgage loan will be second in line to be paid. However, you may find that second mortgage rates still may be lower than rates on unsecured debt like personal loans or credit cards.
  • The choice between a home equity loan and a refinance depends on your financial circumstances. The home equity loan is probably a simpler, easier proposition if you need a five-figure lump sum for certain expenses. The refinance might work better if you want to change the terms of your mortgage.


    A HELOC might be a better option in situations where the homeowner has ongoing financial needs, such as recurring tuition payments or a series of home upgrade projects, and wants to keep drawing money as needed. It’s also likely a better choice if you already have a good rate on your mortgage.
  • If you’re not sure a second mortgage is right for you, there are other options. A personal loan lets you borrow money for many purposes. They tend to cost more and have lower limits, but they don’t put your home at risk and are easier and quicker to obtain.


    A cash-out refinance replaces the first mortgage on your home with a new mortgage that’s more than the current outstanding debt on your home. You then receive the difference between the existing mortgage and the new mortgage in a one-time lump sum. This option may be best for someone who has a high interest rate on a first mortgage and wants to take advantage of a drop in rates since then. However, mortgage rates have risen sharply in 2022 and have remained elevated since, making a cash-out refinance less attractive to many homeowners.


    A home improvement loan, like the Federal Housing Administration’s FHA 203(k) rehab loan, is another option if you’re specifically looking to pay for projects around the house. If you’re looking to turn home equity into a source of cash flow for retirement and are of a certain age, you may want to consider a reverse mortgage.

Additional reporting by Lena Borrelli