What Is a Second Mortgage? | Mortgages

Did you know your home can serve as collateral for multiple loans at once? If you take out a loan that’s secured by your home when you already have a primary mortgage, your new loan is called a second mortgage.

You might get a second mortgage to pay for a big purchase or to finance a home improvement project. Or, you might take out a second mortgage when you purchase a home to avoid paying private mortgage insurance.

A second mortgage is a loan secured by real estate when there is already another loan tied to the property. There are a few different names for second mortgages:

When you take out a second mortgage, a lender issues a loan or credit line that’s secured by your home equity. The lender then gets a lien on your property, meaning that it has a legal right to be repaid before you can sell your home.

Homeowners insurance is typically required to get a second mortgage, and the lender must be added as a payee on your policy.

Applying for a second mortgage is similar to applying for a first mortgage. You can usually get started online, over the phone or in person. Expect to provide your name and Social Security number, plus details about your income, employment and the home you’re using as collateral. The lender will also check your credit.

Requirements can vary among lenders, but you generally need the following to qualify for a second mortgage:

Lenders offer different types of second mortgages to suit different borrowing needs. Here are the most common loan types:

If you take out a home equity loan, you receive the entire amount that you’re borrowing at closing. Then, you make regular payments of both principal and interest over a set period, typically five to 30 years. The interest rate on a home equity loan is fixed, so you know in advance what your payments will be.

A home equity loan can be a good choice when you know how much money you need upfront – for instance, to consolidate debt, cover a home renovation or finance a large purchase.

A piggyback loan is a second mortgage that’s used to cover part of the purchase price of a property. The first mortgage and the piggyback loan close together.

Getting a piggyback loan may allow borrowers to avoid paying private mortgage insurance, or PMI. Borrowers usually have to pay PMI if they make a down payment that’s under 20%.

With a piggyback loan, they can put down a lower amount and borrow to make up the difference. For example, a homebuyer might take out a first mortgage for 80% of the home’s value and a 10% piggyback second mortgage. They could then put just 10% down without owing PMI.

A piggyback loan can also be helpful for homebuyers who want to borrow more than the conforming loan limit, which some lenders won’t exceed. Borrowers can take out a first mortgage up to that limit and make up the difference with a piggyback loan.

A home equity line of credit allows you to borrow against the equity in your home, up to an approved limit. You can tap your credit line, pay it back and borrow again as often as you want during the first few years of the loan term, which is called the “draw period.”

You only pay interest on the amount you actually borrow.

“Let’s say you took a $50,000 home equity line of credit because you needed a new roof, and you only needed $20,000 of that $50,000. You would only be charged interest on that $20,000,” says Carolyn Morganbesser, AVP of mortgage originations at Affinity Federal Credit Union.

HELOC payments during the draw period are often interest-only, but you can pay more. The draw period for a HELOC runs between five and 15 years. When the draw period is up, you enter the repayment phase. You must make regular payments covering both interest and principal to clear your balance by the end of the loan term.

Traditional HELOCs have variable interest rates. “It usually starts with an introductory rate, and then the rate adjusts based on the prime rate. A lot of times there’s an add-on, so you’ll hear people say ‘prime plus a half’ or ‘prime plus a quarter,'” Morganbesser says.

HELOCs offer more flexibility than a home equity loan and could be used for unpredictable expenses or ongoing needs. “When you are looking for access to capital that you might not necessarily be looking to use immediately, the home equity line of credit can make more sense,” Bauer says.

Fixed-Rate HELOCs are a flexible alternative to fixed home equity loans. Fixed rates can make the loan more stable. Some lenders require you to make a large initial draw when you open the account. Expect to pay a higher interest rate than you would with a variable-rate HELOC.

Hybrid HELOCs, aka convertible HELOCs, come with a fixed interest rate for an initial period that typically lasts a few years. After that, the interest rate varies as on other HELOCs. Some HELOCs allow you to convert part or all of your balance to a fixed rate at one or more times during your loan term.

If you buy a house from a seller who has an assumable mortgage, such as a VA loan, the purchase price might be higher than the balance on the mortgage. Taking out a second mortgage on the property can help cover this gap and allow you to assume the mortgage.

As with any loan, prospective borrowers who are interested in a second mortgage should consider the benefits and drawbacks before applying.