What is a second mortgage and how do you get one?

After property values spiked during the Covid-19 pandemic, many homeowners found themselves sitting on much more equity than they had just a few years earlier. The median sale price of U.S. homes in late 2023 was $95,100 higher than it was in early 2020, according to the latest data from the Federal Reserve Bank.

When your home value rises, so does your equity — the amount of your home you own outright. Home equity is the difference between the current value of your home and the amount you owe your mortgage lender. Not only can equity increase your net worth, but you can borrow money against the equity you’ve built in your home.

If you want to tap into your home equity but don’t want to sell your house, a second mortgage might be able to help. A second mortgage (or “junior lien”) is a loan secured by your home that holds a secondary lien position behind your primary mortgage. Two of the most common types are home equity loans and home equity lines of credit (HELOCs) — both of which allow you to borrow against equity you’ve built in your home.

How does a second mortgage work?

If you opt for a home equity loan or HELOC, you can borrow against a portion of the equity you’ve built in your home — often up to 85%.

Example: If your property appraises for $400,000 and you owe $200,000 on your primary mortgage, you’d have $200,000 in equity to borrow against.

Suppose your lender allows for an 85% loan-to-value ratio — this means that the total debt secured by the home can’t exceed 85% of the home’s value. Since you already have a $200,000 mortgage balance, you could borrow an additional $140,000 in a second mortgage.

$200,000 primary mortgage + $140,000 second mortgage = $340,000 total debt

$340,000 / $400,000 = 0.85 (or 85%)

As long as you make the required payments on time — and secure a competitive interest rate and affordable repayment term — a second mortgage can be a cost-effective way to borrow money. However, if you miss payments and default on your second mortgage, the lender can foreclose on your home and sell it to recover the amount you owe.

After a foreclosed home sells, the secondary mortgage lender is only repaid after the primary mortgage lender has been repaid in full. As a result, second mortgages present a higher risk for lenders and often come with slightly higher interest rates than “first mortgages” carry.

Common second mortgage requirements

The eligibility requirements for second mortgages vary by loan type and lender, but often include:

• Equity: At least 15-20% equity in your home
• Appraisal: An appraisal will determine your home’s current market value and costs an average of $500
• Credit: A credit score in the fair range (mid-600s) or better and a consistent payment history
• Income: Proof of a steady, reliable income source that enables you to afford mortgage payments
• Debt: A debt-to-income (DTI) ratio below 43% to prove you can afford the loan payments after paying your current debt obligations
• Money to cover fees: Funds available to pay upfront fees (when applicable), such as closing costs and appraisal fees
• Documentation: Documentation to back up the information on your application, such as bank statements, pay stubs or tax returns to verify income

Types of second mortgages

There are two primary types of second mortgages: a home equity loan and a HELOC. Both allow you to tap the equity you’ve built in your home and can be cost-effective ways to borrow money. A third option, a piggyback loan, can only be originated at the same time as your primary mortgage and is used to split the purchase of a home across two loans.

Home equity loan

Best for: Borrowers who know how much they want to borrow, need all the money at once and want a predictable payment plan

“This type of loan is often used for major home improvements or other large expenses, as the loan is provided in one lump sum,” said Eric Bramlett, an Austin, Texas-based realtor.

A home equity loan is a term loan that you repay, plus interest, through installment payments over a set period. You might borrow $10,000 at 7.75% and make monthly payments of $202 over five years, for example.

Interest is charged on the entire loan amount from the date of disbursement and is built into your fixed payment amount. You also typically have to pay closing costs, ranging from 2% to 6% of the loan amount.

Related >> The best home equity loan rates

Home equity line of credit

Best for: Borrowers who aren’t sure how much they need to borrow or who need the funds in phases

A HELOC is a revolving credit line with a set draw period. Interest is only charged on amounts you withdraw during that time. Lenders may also charge appraisal fees, application fees and closing costs — although many waive the upfront costs.

“A HELOC can often be put in place with no upfront costs, although most have a yearly maintenance fee (usually $100 or less) and an early termination fee,” said Warren Ward, an Indiana-based certified financial planner. While a home equity loan has a fixed interest rate, HELOC rates are typically variable and fluctuate with the market.

During a HELOC draw period, typically ten years, lenders may require interest-only payments or payments that cover interest and a portion of the principal. Once the draw period ends, you enter the repayment period, when the full amount may become due or be converted into a term loan.

Related >> The best HELOC lenders

Piggyback loan

Best for: Borrowers who want to avoid private mortgage insurance but don’t have cash on hand for a 20% down payment

A piggyback loan is a second mortgage you take out at the same time as your primary conventional mortgage. Its main purpose is to help you cover the 20% traditional down payment required to avoid private mortgage insurance. Interest rates on piggyback loans are often much higher than on conventional primary mortgages.

While popular during the early 2000s, these loans are harder to find today. If you don’t have enough money saved for a down payment, ask your loan officer whether a piggyback loan is possible in your situation. Keep in mind that since you’re borrowing two separate loans, you’ll have to pay two sets of closing costs and two different mortgage payments.

Pros and cons of a second mortgage

Pros	Cons
Low interest rates compared to unsecured forms of borrowing Access to large loan amounts Long repayment terms	Must meet equity, credit and income requirements to qualify Higher interest rates than refinancing Expensive closing costs may apply Can lose your home if you default

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Compared to other products, like personal loans and credit cards, a second mortgage usually offers lower interest rates that can reduce your overall cost of borrowing. It also opens the doors to larger loan amounts — you may be able to borrow between 80% and 90% of your home’s equity. Additionally, these loans come with lengthy repayment terms of up to 30 years, so you can keep your monthly dues affordable.

But if you haven’t built much equity in your home, you may not be able to borrow as much money as you need. You’ll also typically need credit scores above 620, low levels of debt and a steady income. Further, you can expect higher interest rates than you’d pay with a mortgage refinance and closing costs that can amount to 2% to 6% of your loan amount.

As with a primary mortgage, defaulting on the loan can trigger foreclosure — put simply, you can lose your home if you don’t make the loan payments.

How to get a second mortgage in 5 steps

1. Evaluate your equity and calculate your borrowing power

Start by calculating how much equity you have in your home. Estimate your home’s fair market value using property search sites like Zillow or Redfin. Then, subtract your current mortgage balance (and any other loans secured by the property) from the value.

Example: Suppose your home is worth about $400,000 and you still owe $250,000 on the mortgage. You have $150,000 in equity.

But that doesn’t mean you can borrow $150,000. Most lenders limit borrowing to 85% of the total debt secured by the home, including your potential second mortgage.

On a $400,000 home, you can borrow as much as $340,000 ($400,000 x 0.85 = $340,000). Since you already owe $250,000 on a primary mortgage, you could borrow an additional $90,000 with a second mortgage.

Keep in mind: Your actual equity — and borrowing power — will depend on the appraised value of your home. Be prepared for the possibility that an appraiser says your home is worth more or less than the figures you find online.

2. Check your credit

Your credit scores tell lenders how responsible you are as a borrower and how likely you are to repay loaned funds. As a result, the higher your credit scores, the more likely you are to be approved with favorable rates and terms.

Most lenders look for credit scores above 620, but if you want the lowest available rates, you’ll need scores above 700. If your credit needs work, focus on increasing your scores (by paying down debt and disputing errors on your credit reports) before applying for a second mortgage.

3. Choose the product that meets your needs

Your plan for the loan funds can help you determine whether a home equity loan or HELOC is best. If you need a lump sum and know how much you need to borrow, the fixed interest rates and predictability of a home equity loan might be best. But if you prefer variable amounts and a line of credit to draw on as needed, a HELOC could fit the bill.

4. Shop around

If you get a quote from only one lender, you could be leaving money on the table. Compare rates and terms from multiple lenders — including banks, credit unions and online lenders — to zero in on the best deal for your situation.

When shopping for the best mortgage rate, review each loan’s annual percentage rate (APR), rather than its interest rate — the APR includes any lender fees and will give you a more accurate comparison of the loans’ true costs.

Good to know: If you limit your rate shopping to a 14-day window, the credit bureaus will count all the credit pulls as a single inquiry, which can limit the negative impact on your credit scores.

5. Submit an application

Once you’ve found the lender that best meets your needs, you’ll submit a formal application. Many lenders offer fully online application processes, but some may require you to visit a branch or apply over the phone.

The documents you must provide vary by lender, but generally, you’ll need:

• Identity verification, including a government-issued ID and Social Security number
• Proof of income, such as W-2s or recent pay stubs
• Information about your primary mortgage, including your current balance and a recent mortgage statement
• Salary and employment information
• Proof of homeowners insurance

Second mortgage vs. refinance: What’s the difference?

With a second mortgage, your primary mortgage remains unchanged and you borrow against the amount of your home you own outright. In this scenario, you’ll have two mortgages (and two monthly payments).

If you want to tap your home equity and replace your mortgage, you might consider cash-out refinancing. Your refinance loan pays off your original mortgage and replaces it with a higher loan amount — you’ll receive the extra funds in cash at closing.

Choosing a cash-out refinance or a home equity loan comes down to whether you want to touch your primary mortgage. If mortgage rates have dropped (or your credit has substantially improved) since you originally borrowed, it could make sense to refinance. But if you can’t snag a lower rate, it might be more cost-effective to borrow a second mortgage.

	Home equity loan	HELOC	Cash-out refinance
Interest rate types	Fixed	Variable	Fixed or variable
Repayment terms	Up to 30 years	10-year draw period, followed by a 20-year repayment period	Up to 30 years
Loan amounts	85% or higher, varies by lender	85% or higher, varies by lender	80% or higher, varies by lender
How you’ll receive funds	In a lump sum at closing	As needed during the draw period	In a lump sum at closing
Replaces existing mortgage?	No	No	Yes
When to consider it	If you want a lump sum without affecting your mortgage	If you want to borrow as needed without affecting your mortgage	If you can get a lower mortgage rate

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Related >> Cash-out refinance vs. home equity loans: How to choose

Should I get a second mortgage?

If you’re not sure whether a second mortgage is right for you, consider these questions:

• Do the payments comfortably fit into your budget? A second mortgage comes with high stakes and will add to your overall debt load. Review your monthly budget carefully to see how much income you have left over after paying your regular expenses. Determine whether you can cover the second mortgage monthly payment and still have a cash buffer for emergencies.
• Will the funds help to improve your financial situation in the long run? Using the funds on expenses that offer returns can reduce your risk as a borrower. For example, investing in home improvements can increase your home’s value, while a college or graduate degree can increase your income. Think over how you plan to spend the funds and whether it’ll be worth it in the long run.
• Can you afford the upfront costs? Second mortgages can come with closing costs that range from 2% to 6% of the loan amount.
• Is it the best borrowing option for your situation? If you need a loan, consider the pros and cons of various options. For example, you may take out an unsecured personal loan, borrow from a life insurance policy, borrow against a 401(k) account or take out a loan from a family member.

A second mortgage offers an affordable way to borrow a large amount of money. However, it requires repayments over a long term — often decades. It also puts you at a greater risk of losing your home if you run into financial trouble.

Carefully weigh the costs and benefits to decide if it’s the right move for you. If you aren’t sure, consider consulting a financial advisor.

Additional reporting by Anna Baluch