What Is a Second Mortgage?

Learn About Borrowing from Your Home’s Equity

A second mortgage is a way to borrow cash from the value of your home's equity. Learn more about second mortgages, how a second mortgage works, and how you can harness its cash-borrowing power.

What Is a Second Mortgage?

Second mortgages are loan options that allow borrowers to tap into the equity of their existing home. Sometimes referred to as a "junior lien," a second mortgage is a loan secured by your home that is separate from your current mortgage, which means you'll pay it back monthly while still making current payments on your first mortgage.

What Can a Second Mortgage Be Used For?

Funds from a second mortgage can go toward a variety of things, including (but not limited to):

• Education expenses
• Debt consolidation
• Home renovations
• Unexpected financial needs
• Business investments

Before taking out a second mortgage, consider your financial situation, your comfort with having to pay on two mortgages at the same time, and the potential risks involved.

How Does a Second Mortgage Work?

A second mortgage is a loan, in addition to your primary mortgage, that allows you to use your home as collateral to borrow against your home's equity. Similar to the process of your primary mortgage, you submit an application, have your financial information verified, and receive funds if approved. You then make monthly payments on the second loan based on its rate and term. Unlike with your primary mortgage, though, the money you receive with the loan on a second mortgage takes the form of cash.

Second Mortgage Eligibility

To get a second mortgage, you'll need to meet some basic lender requirements, which often include:

• A sufficient amount of available home equity—usually at least 20%
• A maximum combined loan-to-value ratio (the sum of all outstanding home loan balances divided by home value) of 80% or 85%
• A healthy credit score—usually a minimum requirement of 620 (Freedom Mortgage has a minimum of 640)
• The ability to provide financial documentation, such as proof of income, debts, and assets

Requirements vary by lender and the type of second mortgage, so review what's required before starting your application. For example, you may need an updated home appraisal.

Types of Second Mortgages

There are two primary types of second mortgages. One is a home equity loan. The other is a home equity line of credit, also known as a HELOC. How second mortgage funds will be distributed and repaid will depend on which option you choose:

1. Home equity loan: You get a lump sum of money upfront that you make monthly payments on over a set repayment term. You pay interest on the amount borrowed, typically at a fixed rate.
2. HELOC: A HELOC is similar to a credit card, letting you borrow against an approved limit with flexible repayment terms. You can repay and borrow again within a specific draw period, during which you're only required to make interest payments. After the draw period, your payment will include principal and interest until the loan is paid off. HELOCs are typically set at a variable mortgage rate, which means the rate can adjust up or down during the payment period of the HELOC.

Both types of second loans allow you to access your home's equity for cash, but they provide different ways of getting and repaying that cash.

Pros and Cons of a Second Mortgage

While there are several benefits of a second mortgage, this option also comes with some downsides to keep in mind:

Remember, other financing options may be available if you decide a second mortgage isn't right for you. For example, a cash out refinance could give you access to the money you want, without having to manage an additional mortgage.

Second Mortgage FAQs

Have more questions about second mortgages? We've got you covered.

Why Are Second Mortgage Rates Often Higher?

Second mortgages can have slightly higher interest rates because they are subordinate to your first mortgage. That means in cases where the borrower defaults, the lender who holds the first mortgage is paid first, and the lender who holds the second mortgage is paid second, and only if there is money left from the value of the home used as collateral.

This can make second mortgages riskier for investors, and lenders may have to charge higher rates, apply stricter underwriting standards, or allow homeowners to borrow less cash as a result. Depending on your credit and finances, you may qualify for a cash out refinance when you don't necessarily qualify for a home equity loan or HELOC.

What Can You Do with the Cash from a Second Mortgage?

You can use the cash from a second mortgage for home improvements, education expenses, business investments, debt consolidation to a lower interest rate, and more. Keep in mind you can use the money for more than one thing. For example, you could use the cash from a second mortgage to both pay down student loans and cover home repairs.

How Much Can You Borrow with a Second Mortgage?

With a second mortgage, lenders typically let you borrow up to 80%—in some cases even more—of your home's appraised value. You'll need to subtract the remaining balance of your primary mortgage, however, to get an accurate estimate of how much money you'll actually be able to access from your home's equity.

What Is the Minimum Down Payment for a Second Mortgage?

Generally speaking, a second mortgage doesn't require a down payment. However, to qualify, you must have sufficient home equity.

Can I Use Home Equity To Buy Another House?

Yes, you can take the money you access with the loan from a second mortgage and put that money toward the purchase of another home. For example, you might use the loan funds to cover your down payment. Keep in mind, when you do this you're taking on more debt and could face greater financial risk if home values drop.

Final Thoughts on Second Mortgages

With a better understanding of how second mortgages work, consider the benefit you might enjoy from a second mortgage. If you decide a second loan isn't the right fit, it might be a good idea to explore other options—such as a cash out refinance. With a cash out refinance, which we offer at Freedom Mortgage, you can tap into your home's equity without taking on a second mortgage and the various risks that come along with it. Talk with a loan advisor today or see if you prequalify for a cash out refinance.

Freedom Mortgage offers cash out refinances, including cash out refinances on Conventional, VA, and FHA loans. We do not offer home equity lines of credit or home equity loans. The standards you need to meet to qualify for loans can vary from lender to lender, and the fees and interest rates lenders charge can vary, too. Research your options and choose the one that is right for your needs.