Second Mortgage: What It Is, How It Works, When To Get One

If you have a first mortgage, and you’ve thought about consolidating your debt or financing a few home improvements, you might have considered taking out a second mortgage.

A second mortgage loan — where you borrow against your home’s equity — can give you the cash you need for important financial goals. However, they’re not for everyone. Second mortgages come with some risk.

What is a second mortgage?

A second mortgage is a form of loan where the collateral is your home. You can borrow against your home’s equity to get the money you need for major expenses or big purchases.

Your home’s equity is the house’s current value minus what you still owe on the mortgage. For example, if your home is worth $300,000, and you still owe $200,000, your home’s equity is $100,000.

Use a loan-to-value calculator to quickly and easily determine your home's equity.

Second mortgage vs. refinancing

When you take out a second mortgage, you’re taking out a mortgage in addition to your existing one. That means you’ll be responsible for another monthly payment.

If you have mortgages from two different lenders, you’ll also have two liens on your home.

By contrast, a mortgage refinance replaces your existing loan with an entirely new one.

You can choose a new lender, a new loan term, and possibly receive a lower rate. With a cash-out refinance loan, you can also get money to put toward renovations or debt repayment.

Ways to use a second mortgage

Second mortgages can be used for whatever purpose you need, but in general, it’s a good idea to save them solely for essential purchases rather than luxuries or splurges.

Your home serves as collateral, so if you can’t keep up with the payments, you risk foreclosure.

That said, there are occasions when taking out a second mortgage might make sense for you:

• Debt consolidation: If you have higher interest rate debt, such as credit card balances or medical bills, using a second mortgage for debt consolidation can help you save money. Because the second mortgage is secured by your home, you might receive a lower interest rate than you’d get with a personal loan, which can help you pay off your debt faster.
• Major repairs: If your home needs significant repairs, such as replacing your roof or installing solar panels, you can use a second mortgage to finance those costs.
• Home renovations: You can use a second mortgage to renovate and update your home. Whether you’re adding a bathroom or replacing kitchen appliances, renovations can help improve your home’s resale value.
• Medical bills: If you have medical procedures coming up, you know how expensive they can be. A second mortgage can help you pay for those procedures, and finance them over several years.
• College costs: If your children are entering college, you can use a second mortgage to cover the cost of tuition and room and board.

Types of second mortgages

Second mortgages come in two forms: home equity loans and home equity lines of credit.

Home equity loan

Home equity loans are disbursed as a lump sum and typically have a fixed interest rate and fixed repayment term.

Home equity loans are best if you know exactly how much money you need, so they’re suitable for debt consolidation or paying off existing medical bills.

HELOC

Home equity lines of credit (HELOCs) give you access to a revolving line of credit, so you can tap into the funds repeatedly and only pay interest on the amount you borrow.

When deciding between home equity loans and HELOCs, keep in mind that HELOCs are useful if you have a project and don’t know the exact cost, such as home renovations or repairs.

Learn more about second mortgages:

• Second Mortgage vs. Home Equity Loan: Understanding the Difference
• HELOC vs. Home Equity Loan: How to Decide

Pros and cons of second mortgages

If you’re considering a second mortgage, there are some pros and cons to keep in mind before you take one out.

Pros of a second mortgage

• Lower interest loan: Because your second mortgage is secured by collateral, it’s more likely that you’ll qualify for a lower interest rate than you would get with an unsecured personal loan or credit card. With lower rates, you’ll pay less in interest over time, helping you save money on major expenses.
• More time to repay debt: With personal loans, the maximum loan term is usually around seven years. In comparison, the loan term for a second mortgage can be as long as 30 years. With longer terms, your monthly payments will be lower, making them more affordable each month.
• Interest payments are tax-deductible: If you’re using a home equity loan to buy, build, or make improvements to the home that secures your loan, your interest payments could be tax-deductible. According to the IRS, you can only deduct interest payments on a total of $750,000 ($375,000 if married filing separately) in qualified mortgage debt.

If you’re using the proceeds of a second mortgage for personal expenses, such as paying off student loans or credit cards, then the interest would not be deductible, regardless of whether you have hit the limit. Consider contacting a tax professional before claiming the deduction.

Cons of a second mortgage

• Using your home as collateral: With a second mortgage, your home is your collateral. If you can’t keep up with your mortgage payment, the bank could foreclose on your home.
• Home’s value could decline: While real estate is usually viewed as a sound investment, there’s no guarantee that your home’s value will increase over time. If the housing market dips again, you could end up owing more on your home than it’s worth if you take out a second mortgage. 

How to get a second mortgage

To qualify for a second mortgage in the form of a home equity loan or HELOC, you’ll need to meet the following loan requirements:

• Equity: You need to have at least 15% equity in your home. The maximum you can borrow is typically 85% of your existing equity.
• Debt-to-income ratio: Your debt-to-income ratio — or the amount of debt you have relative to your gross income — usually cannot exceed 43%.
• Credit score: You should have good to excellent credit before applying for a home equity loan or HELOC. While exact credit score requirements vary by lender, you’ll generally need a score in the mid-600s to qualify for a second mortgage.
• Payment history: Lenders will expect you to have a strong payment history, without any recent missed payments.

If you meet that criteria, start by getting quotes from multiple mortgage lenders. The application process is similar to the process for getting your primary mortgage.

Consider a cash-out refinance instead

While a second mortgage can be useful in certain circumstances, they’re not for everyone. If you’re looking for another alternative, consider cash-out refinancing.

A cash-out refinance involves tapping into your existing home equity and refinancing into a larger loan, replacing your original mortgage in the process. The new loan typically has a lower interest rate — just remember that the rate applies to the entire new loan balance. You’ll likely also have to pay closing costs when you take out a cash-out refinance, which can include origination fees, appraisals, and title fees.

Be sure to shop around and compare rates with multiple lenders if you decide to go with a cash-out refinance. You can do this easily with Credible and see your prequalified rates in just a few minutes.

Find Out: Cash-Out Refinancing vs. Home Equity Loan: How to Choose

Frequently asked questions

What is a second mortgage and what is its primary purpose?

If you have a primary mortgage and want to borrow against the equity you’ve built in your home, you can use a second mortgage. Many homeowners take out a second mortgage and use the lump sum to pay off student loans, and credit card debt, make home improvements, or tackle other hefty financial goals.

What are the potential downsides of taking out a second mortgage?

When you take out a second mortgage, you’re using your home as collateral. If you can’t keep up with monthly payments, you could lose your home to foreclosure. In addition, you might have a higher interest rate on your second mortgage compared to the first, which puts you at risk of taking on more debt if your home’s value declines. 

How much can I borrow with a second mortgage, and what are the typical terms?

Your lender will determine how much you can borrow, but many financial institutions allow up to 85% of your home’s equity. For example, if the value of your home is $250,000 and you still owe $100,000 on your primary mortgage, then your equity is $150,000. If your lender allows you to borrow up to 85% of your equity, in this case, your maximum loan amount would be $127,500. The terms will also depend on what your mortgage lender offers, but repayment terms usually range from five to 20 years.

Do I need to have 20% equity in my home to qualify for a second mortgage?

Some second mortgage lenders might prefer 20% equity, but in many cases, it comes down to your overall financial situation. Lenders will review your credit score, income, current debt, and the amount of equity you have when they determine whether to approve you for a home loan.

Is it difficult to obtain a second mortgage?

Having a better financial profile will improve your chances of getting a second mortgage. Lenders weigh your debt-to-income ratio (DTI), equity, credit score, and how you’ve managed debt in the past to assess how likely you are to repay an additional loan.

Should I consider a second mortgage if I have bad credit?

It might be more difficult to qualify for a second mortgage with bad credit since many financial institutions require a credit score in the mid-600s or better. Having a poor credit score also might mean you have to pay a higher interest rate. A second mortgage might be beneficial, for example, if you want to consolidate debts that have higher interest rates. Before taking out a second loan, make sure the monthly payments are manageable.