Second Mortgage
Second mortgage summary:
A second mortgage is a loan on a property where there's already a mortgage.
There are three main types of second mortgages: Home equity loans, home equity lines of credit (HELOCs), and piggyback loans.
Generally speaking, interest rates on second mortgages tend to be lower than personal loan rates and higher than first mortgage rates.
Second mortgage definition and meaning
A second mortgage is a loan against a piece of real estate that already has a primary mortgage against it. When you have a second mortgage, you have two mortgage payments to make. Both loans are guaranteed by the home itself. If you stop paying one or both of the loans, you could lose the home.
Key concept: A second mortgage is a home loan in addition to the primary mortgage.
Types of second mortgages
The three main types of second mortgages are piggyback loans, home equity loans, and home equity lines of credit.
Piggyback loan
A piggyback loan is a second mortgage that you get when you buy the home. Its purpose is to increase the size of your down payment so you can avoid PMI (private mortgage insurance).
If you make a down payment of less than 20%, your lender will probably require that you buy PMI. PMI protects the lender. The premiums are added to your monthly payment. The annual cost of PMI is usually between 0.58% and 1.86% of the loan balance. If your loan balance is $400,000 and your PMI is 1.2%, your premium would be $407 per month, on top of your mortgage payment.
You’re eligible to get rid of PMI once you have 20% home equity. Home equity is your home’s market value minus the balance that you owe on your primary mortgage. Interestingly, second mortgages aren’t included in the PMI calculation.
If you can afford to make a 10% down payment, but you don’t want to pay PMI, some lenders allow you to take a piggyback loan to cover another 10% toward the down payment. This is sometimes called an 80-10-10 loan.
In this situation, it might work out to your benefit financially to take on the additional loan payment and avoid PMI.
Home equity loan
A home equity loan is a second mortgage. To get one, you must have sufficient home equity and meet the lender’s other requirements.
Let’s say your home is worth $500,000 and you still owe $150,000 on your mortgage. You have $350,000 in home equity, or about 70%. If you wanted to borrow another $150,000 to do a remodel, a home equity loan could be an option.
If you’re approved for a home equity loan, you’ll receive all of the money in one lump sum when the loan is approved. Then, you’ll pay it back in equal monthly installments for the number of years in your loan agreement (typically 10 to 30 years).
Most home equity loans have a fixed interest rate.
Home equity line of credit (HELOC)
A HELOC is also a second mortgage, and it’s similar to a home equity loan. You need to qualify and have enough equity to borrow against. The biggest difference is that a HELOC is a line of credit, similar to a credit card.
If you’re approved for a HELOC, you can borrow, repay, and borrow more, up to your credit limit, as often as you like during the first few years of your loan. This is called the draw period, and it typically lasts for five to 10 years.
After the draw period ends, you’ll enter the repayment period and can’t borrow more. You’ll make monthly payments for the duration of the loan term.
Most HELOCs have a variable interest rate, which means the cost of borrowing could change. Achieve’s HELOC has a fixed interest rate that never changes, for the life of your loan.
Related: Fund your future with a 30-year HELOC
More about second mortgages
Like any financial product, second mortgages have both pros and cons to consider.
Pros
A second mortgage could help you avoid paying for private mortgage insurance (PMI) when you buy a home.
The loan limit on second mortgages tends to be higher than personal loans. If you need to borrow a large amount, such as for medical bills or home renovations, a second mortgage could get you the money you need.
Many second mortgages come with a fixed interest rate.
There could be tax advantages with a second mortgage. If you use a home equity loan or HELOC to build or improve your home, the interest on the loan might be tax deductible.
We provide general information but we’re not tax pros. Consult a qualified tax professional about your specific situation.
Cons
Taking out a second mortgage requires using your home as collateral. If you default on the second mortgage, you could lose your home.
The interest rate on a second mortgage is typically higher than the rate on a first mortgage.
Second mortgages tend to be for big amounts, and that means adding a big amount of debt that could take a long time to pay off.
You’ll be making two mortgage payments every month, and that could cause financial strain.
Second mortgage: a comprehensive breakdown
Second mortgages are equity-based, meaning the equity in your home secures them.
The interest rate on a second mortgage is typically higher than the rate on your first mortgage because lenders find them a bit riskier. That's because if you default on your loan, the first mortgage is paid off before the second mortgage.
Repayment terms vary depending on the type of second mortgage, but they typically range from five to 30 years. Second mortgages can be used for a wide range of purposes, including:
Down payment (not all second mortgages can be used for a down payment)
Home improvements
Major expenses
Education
Second Mortgage FAQs
Is a HELOC a mortgage?
A HELOC is typically a second mortgage loan. It doesn't replace the original mortgage you took out to buy your home. When you get a HELOC, you'll have to make payments to both your line of credit and your first mortgage until they're paid off.
Is there a risk associated with a second mortgage?
If you fail to make payments as agreed, the lender has the right to foreclose on your property, sell it, and recoup their loss. While there's no way to predict the future, it’s smart to protect yourself against this risk by doing everything within your power to ensure you can afford to take on the new loan. Have a plan for how you'll handle payments if things go south, such as if you experience a serious illness or job loss.
Will a lender allow me to borrow the full amount of equity in my home?
Sometimes, but most lenders have a lower limit. Here’s how it works:
Most home equity lenders limit CLTV to about 80-85%. The amount you can borrow with a home equity loan is based on the lender’s dollar limit (the same ceiling for all customers) and your combined loan-to-value (CLTV) ratio (unique to your application). Loan-to-value is your current mortgage balance compared to its current market value. For combined loan-to-value, the lender will look at your current mortgage balance plus the home equity loan you want.
If your home is worth $600,000 and you still owe $300,000 on your mortgage, your LTV is 50%. You want to borrow $100,000 to consolidate high-interest credit card debts and pay off some medical debt. With this new loan, your CLTV would be 67%, which is under the limit for most lenders.
There are loan programs that allow a higher CLTV but they are less common.
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