What is a Second Mortgage?
Learn How to Borrow from Your Home's Equity
A second mortgage allows you to access cash by borrowing against your home's equity. There are two primary types of second mortgages:
Home Equity Lines of Credit (HELOCs) and
Home Equity Loans.
These are called second mortgages because they are additional loans secured by your home while you're still making payments on your first mortgage, which is the loan used to purchase or refinance your property.
Second mortgages typically come with higher interest rates and stricter credit requirements compared to first mortgages. Additionally, you may be able to borrow less money through a second mortgage than through a cash-out refinance.
With a
cash-out refinance, you replace your existing mortgage with a new one for a larger amount and receive the difference in cash at closing.
Why Do Second Mortgages Have Higher Interest Rates?
Second mortgages often have higher interest rates because they are subordinate to your first mortgage. In the event of a default, the lender of the first mortgage is repaid first from the sale of the home, and the lender of the second mortgage is repaid only if there are remaining funds.
This increased risk for lenders means that second mortgages usually come with higher interest rates, stricter loan qualifications, and lower borrowing limits. However, depending on your credit score and financial profile, you may still qualify for a cash-out refinance even if you don’t qualify for a second mortgage.
How Do Second Mortgages Work?
Second mortgages operate similarly to other types of home loans. You will need to fill out an application, submit financial documents, meet credit and income requirements, and pay closing costs.
Your lender may require a new home appraisal to determine your property's current market value. This appraisal helps assess the amount of equity you have, which in turn affects how much you can borrow through your second mortgage.
What Can You Do with Cash from a Second Mortgage?
Cash from a second mortgage can be used for various purposes, such as home improvements, education expenses, business investments, or consolidating higher-interest debts. You aren't limited to using the money for just one purpose. For example, you could allocate part of the funds for paying off student loans and another portion for home repairs.