What Is a Second Mortgage?

Learn About Borrowing from Your Home’s Equity

A second mortgage is a way to borrow cash from the value of your home's equity. Home equity lines of credit (HELOCs) and home equity loans are types of second mortgages.

They are called second mortgages because these are loans secured by your home while you are still making payments on your first mortgage, which is the loan you used to buy or refinance your home.

Second mortgages can have higher interest rates and stricter credit requirements compared to first mortgages. You may also be able to borrow less money with a second mortgage compared to a cash out refinance.

Cash out refinances let you replace your current mortgage with a new mortgage for a higher amount and get the difference in cash at closing.

Why Can Second Mortgages Have Higher Interest Rates?

Second mortgages can have higher interest rates because they are subordinate to your first mortgage. That means in cases where the borrower defaults, the lender who holds the first mortgage is paid first and the lender who holds the second mortgage is paid second – if there is money left from the value of the home used as collateral.

This can make second mortgages riskier and lenders may charge higher rates, apply stricter underwriting standards, or allow homeowners to borrow less cash as a result. Depending on your credit and finances, you may qualify for a cash out refinance when you don't qualify for a home equity loan or HELOC.

How Do Second Mortgages Work?

Second mortgages work like other kinds of home loans. You'll have to complete an application, submit documents, meet credit and financial requirements, and pay closing costs.

Your lender will probably require a new home appraisal to determine the current value of your home. This appraisal is important to calculating how much home equity you have and how much money you might be able to borrow from it.

What Can You Do with the Cash from a Second Mortgage?

You can use the cash from a second mortgage to pay for home improvements, education, business investments, debt consolidation, and more. Keep in mind you can use the money for more than one thing. For example, you could use the cash from a second mortgage to pay off student loans and pay for home repairs.