What is a second mortgage? How does it work?

Second mortgages are any home loans you may have after your primary mortgage. These loans are great for borrowers who need funds for various expenses.  

If you choose to get a second mortgage, you will need to pay it back alongside any primary loans you may have. Because these loans are secured by your home, you will typically tend to get access to a larger sum of money compared to other loan types. 

The two main types of second mortgages you could get are a home equity loan and home equity line of credit (HELOC). 

To get started on your second mortgage, apply for a HELOC or home equity loan. 

How does a second mortgage work? 

Second mortgages will work on top of your primary mortgage and allow you to access a portion of your home equity.  

Your home equity is the difference between your home’s current value and the remaining mortgage balance that you have. With a second mortgage, you will have to pay back your loan alongside your primary mortgage. 

The type of second mortgage you choose will determine how you get funds and pay back the loan. 

Types of second mortgages 

The two types of second mortgages are HELOCs and home equity loans. 

HELOCs open a line of credit based on your home equity, similar to a credit card, and are broken into two parts. During the first part of your HELOC, you can draw funds while only needing to pay interest on the amount you use. During the second part of your HELOC, you will have to pay back your loan amount and interest without being allowed to make more draws. 

With a home equity loan, you access your home equity as a lump-sum without the ability to make additional draws. You will have to start paying back your home equity loan and interest shortly after you begin your second mortgage.  

If you do not have a primary mortgage, you can still get a HELOC or home equity loan. Instead of second mortgages, these will be your primary mortgage. 

How do I qualify for a second mortgage? 

When looking to get a second mortgage, there are a few qualifications you will need to meet.  

Credit score requirements 

When hoping to get either a HELOC or home equity loan, most lenders will look for borrowers to have a credit score of at least 620. The higher the credit score, the better rates a borrower could get. 

Home equity requirements 

If you are looking to get either a HELOC or home equity loan, most lenders look for you to have at least 20% home equity before you do. However, there are some options that allow borrowers with less than 20% equity get second mortgages. 

You can figure out your home equity by subtracting your current mortgage balance from your current home value. Take the number you get and divide it by your home’s current value. Finally, multiply that number by 100 to see the percentage of home equity you own. 

Debt-to-income ratio guidelines 

A debt-to-income (DTI) ratio refers to how much of your current salary is already accounted for in paying back previous debts. Many lenders look for borrowers to have a DTI ratio of no more than 43% if they are hoping to get a HELOC or home equity loan, while some lenders approve borrowers with a DTI ratio of up to 50%. 

Common reasons to get a second mortgage 

While borrowers can get a second mortgage for any reason or to fund any expenses they may have, there are a few reasons that are more common. Here are some of the common reasons borrowers choose to get a second mortgage. 

Using home equity for renovations 

Home renovations are a popular choice borrowers use their home equity for, as some planned improvements could increase home value and equity. If you are looking into home renovations that raise your equity, make sure you research which home improvements have the best return on investment. 

Some renovations or home improvements made through tapping into your home equity could make interest you pay on your loan tax-deductible*. 

Consolidating high-interest debt 

Because second mortgages use your home as collateral, they tend to come with lower interest rates than other loan types. Many borrowers will use these loans to consolidate any debts they may have with a second mortgage. 

Consolidating debts under a loan with lower interest rates could save you money over the life of your loan. 

Funding major expenses 

Your home equity and a second loan are also available to fund any other major expenses. These expenses could be investment opportunities or cover unexpected bills. If you are looking to invest in a second home, diversify your portfolio or add funds to your business, a second mortgage could help. Some expenses can arise without warning, and your home equity is there to help cover those expenses. 

How to apply for a second mortgage 

If you are hoping to get a second mortgage, you should start by deciding which option is best for you and apply through a lender online. 

When deciding whether a HELOC or home equity loan is best for you, look at how you will need the funds and how repayments work for you. A HELOC will give you a line of credit you can draw on for any rolling expenses while only paying interest for the start. Home equity loans will give you a lump-sum amount that you will have to start paying shortly after starting your loan. 

Starting an online application will connect you to a professional Loan Officer who can guide you through the process and help you decide which option is best for you. 

When you are ready to apply for a second mortgage, begin your online home equity loan or HELOC application. 

*Owning does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation. 

Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.  

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