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What Is a Second Mortgage?

Key Takeaways

  • You can take out a second mortgage loan after you’ve built equity in your home.
  • Second mortgages typically have higher interest rates than primary mortgages.
  • Some homeowners choose to refinance when interest rates are low rather than take out a second mortgage loan.

A second mortgage is another loan taken out on a property in addition to a first mortgage. It is also commonly referred to as a home equity loan or line of credit.

Technically, the term “second mortgage” refers to the actual lien position on the property. A home equity loan is disbursed as a lump sum, while a home equity line of credit is a revolving line of credit.

You can take out a second mortgage after you've built equity in your home, usually through paying down a portion of the outstanding principal on your first — or primary — mortgage. Common reasons to apply for a second mortgage include large expenses like medical bills, tuition, home remodeling, debt consolidation, and major purchases like cars.

Your first mortgage is referred to as the primary mortgage because it will always take precedence. In other words, if you were to default on your home loan, you would have to pay off the first mortgage first.

A guide to second mortgage rates

When you apply for a second mortgage, you'll likely find that interest rates are higher than they are on your primary mortgage. This is because your loan is secured by the same collateral — your house — as your primary loan, creating more risk for a lender. To offset the risk, lenders will generally charge higher interest for a second mortgage. However, the interest rate on a second mortgage may still be more competitive than other forms of credit like personal loans and credit cards.

Compare your options

If you're looking to borrow against your home’s equity, you have the choice between a home loan refinance — or cash-out refinance — and a second mortgage home equity loan or line of credit. Each option will allow you to tap into the equity in your home.

With a refinance, you pay off your existing mortgage and take out a new primary mortgage. The new mortgage amount includes not only the funds needed to pay off the remaining balance of the original mortgage but also extra funds, which you receive in a lump sum. Some homeowners may choose to refinance when interest rates are low and a primary mortgage would be considerably less expensive than a second mortgage. This works best when you've accrued substantial equity in the property. Bear in mind that unlike a second mortgage, you'll pay closing costs on a cash-out refinance; you may also have the option of rolling those closing costs into the balance of your new mortgage to reduce your out-of-pocket expense.

More information

We are committed to helping you reach your potential by providing personalized solutions. Our dedicated colleagues can help you find the right product to help you reach your goals. To learn more about mortgage solutions, please call 1-800-288-5569, visit us online, or find a loan officer.