What Is a Second Mortgage?

Second Mortgages Explained

Man and Woman Talking to a Loan Officer in an Office.
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A second mortgage is a type of home loan that you might get in addition to the mortgage you already used to buy your house. It requires an additional monthly payment and uses your home as collateral. Consumers often take out second mortgages to pay for home improvements, cover a down payment or closing costs, consolidate high-interest credit card debt, or pay for other expenses.

As of September 2020, mortgage rates are at historic lows, and homebuying and refinancing activity has surged as a result. The low interest rates may also have many homeowners and buyers considering a second mortgage to help them achieve their financial goals. 

What Is a Second Mortgage?

The mortgage you used to buy your house is what’s called a first, or first-lien, mortgage. It’s the primary loan on your house, and if you fail to pay it back, that first-lien lender will be the one to sell off the home to recoup its losses.

A second mortgage, on the other hand, is a loan that has a junior, or subordinate, position on the home as collateral. If you don’t repay the debt, the second-mortgage lender will only recoup money after the first lender has received the amount it’s owed in full.

With more at risk for lenders, second mortgages often carry somewhat higher interest rates than first mortgages.

If considering a second mortgage, it’s important to remember that it also has a claim on your home as collateral, as discussed. You can get one either when you buy the house, or later on as a homeowner. Common types of second mortgages include:

  • Home equity loans: This is a loan that lets existing homeowners tap the equity they have in their home. You’ll get a lump-sum payment and can use the funds for home improvements or other expenses you may be facing.
  • Home equity lines of credit: Also known as HELOCs, these are another way for homeowners to tap their equity. The main difference is they come as a credit line—not a lump sum, meaning you can draw funds as needed for a certain amount of time (much like a credit card). 
  • Piggyback loans: Mortgage insurance is typically required on home purchases with down payments of less than 20%. With piggyback loans, buyers can borrow money to cover a portion of the down payment and avoid mortgage insurance altogether.

In every case, second mortgages come with a monthly payment, just as your first-lien mortgage does. You’ll need to make those payments every month until the debt is paid off. Sometimes, HELOCs require interest-only payments while you’re still drawing money.

There are also some loans designed to help buyers cover their down payment or closing costs. Many of these act as second mortgages, though some charge no interest or even allow for deferred or forgivable payments. These are typically available through state housing agencies and are designed for buyers who meet certain income requirements.

How Does a Second Mortgage Work?

A home equity loan is one of the most common types of second mortgages. With a home equity loan, the amount of money you can borrow is based on how much equity you have in the home—or the portion of the home’s value you actually own. 

Generally, lenders will only let you borrow about 85% of your home’s value between both mortgage loans. So if your home is worth $250,000, and you still owe $100,000 on that loan, you could borrow up to $112,500 using a home equity loan.

With a home equity loan, you can choose from a number of loan terms, usually from five to 30 years. You’ll get the money upfront in a lump sum, and then pay off the balance—plus interest—over the course of your chosen loan term.

The longer the loan term, the lower your monthly payment will be. However, you’ll pay more in interest over the life of the loan.

How Much Does It Cost to Get a Second Mortgage?

The costs of a second mortgage will vary depending on how much you’re borrowing, your lender, and the type of loan you’re taking out. Generally, though, you can expect to owe a number of closing costs to your lender.

“Most of the time, a second mortgage—similar to a first mortgage—will come with closing costs,” Lauren Anastasio, a certified financial planner (CFP) with SoFi, told The Balance via email. “You could expect to pay for an appraisal, some type of application or underwriting fee, recording fees, etc. If you’re working with a different lender than the one who holds your first mortgage, you can also expect to pay an additional fee the lender will charge to be in second-lien position. This is like extra insurance for the lender if you default, since the lender who holds your first mortgage will basically have first dibs on recouping their losses.”

What Can You Use a Second Mortgage For?

Second mortgages can be used for a number of purposes, though the exact uses depend on which type of second mortgage you’ve taken out. A down payment assistance loan, for example, could only be used for a down payment on a house. 

“Most of the time, people take out a second mortgage to either consolidate debt, do home improvements, or just use it as a line of credit to purchase something,” Michael Sema, founder of Get A Rate, told The Balance via email.

A second mortgage, such as a home equity loan, may help you pay off higher-interest credit card debt faster. You may get a lower interest rate on the new loan than you had on your card, and that could help you save money in the long run.

Alternatives to a Second Mortgage

Second mortgages aren’t the only options if you need additional funding. For many homeowners right now, refinancing could also be a smart choice. 

“A regular refinance is an option,” Sema said. “If somebody was looking to take out cash, but for some reason they couldn't qualify for a second mortgage, borrowers typically would take their first mortgage and add to it. So, let's say, for example, there's a $100,000 first mortgage. They wanted $50,000 on the second, and nobody approved for a second. We might be able to approve for $150,000 because it's a first-lien position on a lower risk factor. Then they could get the $50,000 cash, but now they would start a new mortgage.”

Key Takeaways

  • Second mortgages are additional mortgage loans, taken out on top of the mortgage already used to purchase a house.
  • They also use the home as collateral, though second-loan lenders don’t have the first right to the property if you stop making your payments. 
  • Any time you add to your overall debt burden, you make yourself more vulnerable financially. If considering a second mortgage, understand you could lose your home if you default.
  • Second mortgages come in several forms, including piggyback mortgages, home equity loans, and home equity lines of credit (HELOCs). 
  • You can use second mortgages to pay for home improvements, consolidate debt, pay for a down payment, and more.

Article Sources

  1. Consumer Financial Protection Bureau. "What is a Second Mortgage Loan or 'Junior-lien'?" Accessed Sept. 9, 2020.

  2. Consumer Financial Protection Bureau. "What is a 'Piggyback' Second Mortgage?" Accessed Sept. 9, 2020.

  3. Federal Trade Commission. "Home Equity Loans and Credit Lines." Accessed Sept. 9, 2020.

  4. Citi. "Fixed Rate Home Equity Loans." Accessed Sept. 9, 2020.