WTFinance is a second mortgage and how does it work?

By Kimberly Rotter

Reviewed by James Heflin

Jun 09, 2023

Read time: 3 min

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A second mortgage is a way to turn your home’s equity into spendable cash, while leaving your first mortgage untouched. Let’s explore!

What is a second mortgage?

A second mortgage is—you guessed it—a second home loan when you already have a first home loan. The word “second” is important to the lender, but doesn’t matter much to you. It means the lender is second in line, behind the first mortgage lender, if worst comes to worst and they have to come knocking to collect on the debt. 

A mortgage is a secured loan. The property itself is the guarantee that the lender will receive payment. Most people don’t lose their homes to foreclosure, but it does happen. If you don’t repay your loan, the lender can sell it to get the money they are owed. The first mortgage lender is first in line to receive proceeds of the sale After they’re paid back, if there is still money left, the second mortgage lender gets  paid back. 

So now you know all about the “second” of a second mortgage. 

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Home equity loans are often second mortgages

A home equity loan could be the second mortgage that gives you a one-time lump sum of money. 

Similarly, a home equity line of credit (HELOC) could be a second mortgage, but it works more like a credit card. You can borrow, repay, and borrow more, up to your limit, for a few years (called the draw period). 

In either case, you’ll make monthly payments after the loan has been funded . Some HELOC lenders allow you to pay interest only during the draw period, and others require a principal plus interest payment from day one, based on your outstanding balance.  

Home equity loans can be  fixed-rate and variable rate HELOC. Usually, fixed interest rates are reserved for home equity loans, and HELOCs have interest rates that can fluctuate. If you can find a fixed-rate HELOC (hint, click here, or on the top menu), you could get the benefit of a fixed interest rate and a draw period. 

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Why get a second mortgage?

So why on earth would someone want two mortgages? 

To cover a large expense, on friendlier terms, without giving up their first mortgage.

To consolidate other high-interest debt

You can borrow against your home equity to pay off other debts. Reducing multiple payments down to one can help you simplify your finances. Also, you might be able to get a lower interest rate than what you’re currently paying, or a lower total monthly payment.

To cover major expenses 

Your home might be the most valuable thing you own, but you can’t take it to the store and spend it. You can borrow against it, though, and put the money toward whatever financial priorities are important to you—whether that’s a home repair or remodel, a wedding, or another major purchase.

To protect the original mortgage

If you don’t want to give up your primary mortgage, a second mortgage leaves it untouched—including your interest rate, which may be lower than what you can get today. Also, you won’t have to reset the clock on your repayment period.  

To cover a down payment

If you make a down payment smaller than 20%, most lenders will require that you pay for some form of private mortgage insurance. This insurance protects the lender from losses. 

The down payment is a hurdle for most people, especially in high-cost markets where 20% is a big amount that can be difficult to save up. So some lenders allow borrowers to get a second mortgage to cover a portion of the down payment and avoid paying for private mortgage insurance. This kind of second mortgage is called a piggyback loan.

Should I get a second mortgage or a cash-out refi?

To turn your equity into spendable cash, you can use a home equity loan or a cash-out refinance loan. In a cash-out refinance, you pay off your mortgage with a new, larger loan, and you get the difference in cash.

If your first mortgage interest rate is lower than what you can get right now, it’s a good idea to leave it alone. Yes, two mortgages mean two monthly payments. But it doesn’t make good financial sense to increase the cost of your existing debt. 

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Can anyone get a home equity loan?

Short answer—no. Only some applicants can qualify for a home equity loan. To state the obvious, you need to be a homeowner. Also, to apply, you need at least the following:

Credit score

A fair credit score if you’re using the money to pay off other debts, or a good credit score if you’re using the money for something else.

Sufficient income

A home equity loan lender will look at your verifiable income and your other debts to make sure you can afford the payments on the new loan.

Sufficient equity

Equity is your home’s current market value minus the amount you owe on your first mortgage. Most home equity lenders do not want you to owe more than 80% of the value (which would be 20% in equity). But if you only have 20% in equity, you likely won’t qualify for a home equity loan because there’s no room for more debt against the home. You need to have 20% equity plus more to borrow against.

Turns out that second mortgages aren’t as intimidating as they sound. 

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Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

James Heflin - Author

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

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