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What Is a Second Mortgage and How Does It Work?

Michele Lerner

Michele is a freelance contributor to Newsweek’s personal finance team. She has written thousands of articles over the past three decades dedicated to helping consumers understand their real estate transactions, savings options, loans and more in a variety of publications. Michele lives in Washington, D.C. with her husband and her cat.

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Claire Dickey

Claire is a senior editor at Newsweek focused on credit cards, loans and banking. Her top priority is providing unbiased, in-depth personal finance content to ensure readers are well-equipped with knowledge when making financial decisions.

Prior to Newsweek, Claire spent five years at Bankrate as a lead credit cards editor. You can find her jogging through Austin, TX, or playing tourist in her free time.

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Buying a home is typically the biggest purchase most people make. The majority of purchasers finance their home with a mortgage. Just 19% of people buying their primary residence paid cash in 2023, according to the National Association of Realtors. So, while most people understand that a first mortgage is used to buy a home, they may be less familiar with a second mortgage and want to know how a second mortgage works.

Essentially, a second mortgage is another loan taken out by homeowners while they continue to repay their first mortgage. Both are secured by the same home. Several terms are often used interchangeably with “second mortgage,” so we’ll explain a home equity loan vs. a second mortgage vs. a home equity line of credit and how they work.

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Vault’s Viewpoint on Second Mortgages

A second mortgage offers a way for homeowners to access the equity they have built up in their home.
Second mortgage options include a home equity loan and a home equity line of credit.
Borrowing from your home equity can be a good way to pay for major expenses, such as a home improvement or to consolidate debt, but it comes with the risk of losing your home if you can’t repay the loan.

How Second Mortgages Work

The amount you can borrow with a first mortgage depends on your income, the appraised value of the home you’re financing and your down payment. For a second mortgage, lenders review your income and the value of your home, but they also evaluate your home equity.

Equity refers to the value of your home minus your outstanding loan. For example, if your house is valued at $350,000 and your first mortgage balance is $250,000, your home equity is $100,000. Your home equity increases as you pay down your mortgage and if the market value of your home rises.

Home values have been increasing in recent years. Among homeowners with a mortgage, the average borrower had $298,000 in home equity at the end of 2023, according to CoreLogic, a real estate data analytics firm.

While the specifics vary by lender, most allow you to borrow up to 80% of your home’s value, including both a first and second mortgage. Some lenders allow you to borrow as much as 85% of your home’s value. For example, 80% of $350,000 is $280,000. With an existing loan balance of $250,000, you may qualify to borrow an additional $30,000 with a second mortgage.

The term “second” mortgage means that if you default on your loans and your home has to be sold, your initial mortgage would be paid first. If the sale doesn’t generate enough money, the second loan might not be paid in full. Since these loans are in second position, they often have a higher interest rate than a first mortgage.

Second Mortgage Types: Home Equity Loans and Lines of Credit

Second mortgages include home equity loans and home equity lines of credit (HELOCs).

A home equity loan is a lump sum loan, typically with a fixed interest rate and stable monthly payments. The repayment period depends on the loan program and can be anything from five to 30 years. Your payments are determined by the amount you borrow, the interest rate and the loan term, just like with a first mortgage.
A HELOC is a revolving line of credit, typically with a variable interest rate. You can open a HELOC and only use funds as needed. As you repay the loan, the credit becomes available again. Typically, a HELOC has a draw period of five to 10 years when you can borrow money, followed by a repayment payment period of up to 20 years when you begin making payments. Your monthly payments will fluctuate with the interest rate and your loan balance.

Why Consider a Second Mortgage?

Your reason for applying for a second loan can influence the type of home equity loan you choose. For example, if you want to make a major home improvement or consolidate high-interest credit card debt, a home equity loan may be the better option because you get a lump sum of cash.

If you want to pay tuition by borrowing against your home equity, a home equity line of credit can work well for recurring payments. In some cases, you may not be certain how much you need to borrow to make home improvements. A HELOC offers flexibility so you don’t borrow more than you need. Some people open a HELOC as an additional source of emergency cash. You don’t make payments on a HELOC until you borrow the money and enter a repayment phase.

Steps To Qualify for a Second Mortgage

Applying for a second mortgage is similar to the process of getting a first mortgage. You can shop around for a second mortgage. Start by asking your current lender for information on its home equity loan options. Contact a few other lenders to compare loan programs, rates and terms. Not all lenders offer second mortgages.

Your loan application is based on your credit qualification and your home value. Most lenders look for a credit score of 620 or above for a second mortgage, while some require a credit score of 680 and a debt-to-income ratio of 43% or less, including the payments on the second mortgage. Just like when you applied for your first mortgage, your lender will ask you to provide documentation of your income and assets to make sure you can repay the loan.

Most lenders require an appraisal for an accurate evaluation of your property value to make sure that you will have sufficient equity—typically 20%, even after borrowing with a second mortgage.

Pros and Cons of Second Mortgages

As with any other major money decision, it pays to consider your choice in the context of your individual overall financial plan, including how long you plan to stay in your home.

Pros

Interest rates for second loans, while typically higher than for a first mortgage, are lower than for a personal loan or credit card.
Depending on how much home equity you have, you may be able to borrow more with a second mortgage than with other types of credit.
Under some circumstances, such as when you use the funds to improve your home, the interest paid on your second mortgage could be tax deductible.
Borrowing from your home equity is like borrowing from yourself—as you pay the loan, you are rebuilding your equity.

Cons

The biggest drawback to a second mortgage is that if you cannot repay the loan, your lender could foreclose and you could lose your home.
Applying for a second mortgage requires extensive documentation and could take several weeks.
Depending on the loan program and lender, you may need to pay some closing costs for your loan.
You’ll need to budget for additional loan payments on your second loan, which adds to your housing costs.

Frequently Asked Questions

What Is an Alternative to a Second Mortgage?

In addition to a second mortgage, another way to access your home equity is with cash-out refinancing. Cash-out refinancing means replacing your mortgage with a new one and taking out some of your equity in cash. The new first mortgage typically would have lower rates than a second mortgage, although your closing costs are likely to be higher with cash-out refinancing.

Can You Buy a House With a Second Mortgage?

Since you can use the funds from a home equity loan or a home equity line of credit for any purpose, you may want to use the money for a down payment on a second home. If you have enough equity in your primary residence, you could even take out a second mortgage and use the funds to pay cash for another home. However, using the equity from one home to buy another carries the risk of losing your first home if you cannot repay the loans.

What Is the Purpose of a Second Mortgage?

A second mortgage is a financial tool that allows you to access the equity you’ve built up in your home by paying down your first mortgage with regular or extra payments or because your home has increased in value. You can use a second mortgage to pay for big expenses, recurring expenses, to consolidate high-interest debt or as an emergency fund.

Editorial Note: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, hotel, airline or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post. We may earn a commission from partner links on Newsweek, but commissions do not affect our editors’ opinions or evaluations.