The cost to buy a home in the U.S. has skyrocketed since early 2020, reaching record highs. As a result, many homeowners have significant equity in their homes.

One of the ways homeowners can tap their equity is by taking out a second mortgage, a loan that uses the equity in your home as collateral. Common examples include a home equity loan and a home equity line of credit (HELOC).

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Key takeaways
  • Who: Homeowners with sufficient equity in their homes can take out a second mortgage on the property.
  • What: A second mortgage is a type of subordinate mortgage taken out while the original, or first, mortgage is still being repaid. Like the first mortgage, the second mortgage is secured by a lien on your property.
  • Why: Homeowners take out second mortgages to access cash for uses like paying off debt, funding home renovations and covering medical bills.

What is a second mortgage?

When you take a second mortgage, you borrow from the equity you’ve built up in your home — in other words, the difference between the value of your home and the remaining balance on your first mortgage.  Homeowners typically access equity by taking a home equity loan or a home equity line of credit (HELOC.)

You can use funds from a second mortgage for a variety of purposes. Some of the most common uses of second mortgages include consolidating other debts (especially high-interest credit cards) and financing home improvements or repairs.

How does a second mortgage work?

To obtain a second mortgage, you typically need to do the same things you did to qualify for a primary mortgage. The process includes submitting an application to a lender and providing documentation regarding your income, debts and more. You might also need to get an appraisal to confirm the value of your home.

Equity requirements vary, but many lenders prefer that you have at least 15 percent to 20 percent equity in your home. You can typically borrow up to 85 percent of your home’s value, minus your current mortgage debts. If you have a home worth $300,000 and $200,000 remaining on your mortgage, for instance, you might be able to borrow as much as $55,000 through a second mortgage: ($300,000 x 0.85) – $200,000.

Requirements for applying for a second mortgage

  • At least 15 percent to 20 percent equity in your home
  • Remaining mortgage has to be less than 85 percent of the home’s value
  • A credit score of 600 or higher (recommended)

Types of second mortgages

Borrowers who wish to take out second mortgages can choose between home equity loans or home equity lines of credit. Here’s a look at each of these financing options.

  • Home equity loan: A home equity loan comes with a fixed monthly payment. You receive all of the money upfront and pay it back, with interest, over time. To see if it makes sense for you, use Bankrate’s home equity loan calculator.
  • Home equity line of credit (HELOC): A HELOC also lets you access the equity in your home, but you’re charged interest only on the amount that you borrow. This can be a great option if you’re not sure exactly how much of your equity you’re looking to borrow. Use our HELOC payoff calculator to see if this option makes sense for you.

Should I get a second mortgage?

Before you take out a second mortgage, consider the risks to make sure this type of financing will work well for your situation. The best reason to get a second mortgage is to use the money to increase the value of your home.

Using the money from a second mortgage to improve your home’s value can maintain the equity you have in your home. Plus, if you use a second mortgage to buy, build or substantially improve the home you use to secure the loan, the interest may be tax-deductible.

If you’re thinking about getting a second mortgage to buy a car, pay for a vacation or purchase other luxuries, be cautious. The equity in your home is one of your most important assets — think twice before using it for these types of expenses.

Where to find second mortgage rates

A local bank or credit union can be a good place to start, but be sure to get quotes from several lenders, including online lenders, and compare them in detail. You can browse Bankrate’s best home equity loan rates and the best HELOC rates.

Second mortgage FAQ