Your ’70s bathroom seemed amazing and hip when you bought the house. However, now that the novelty has worn thin, the cultured marble vanity needs to go, along with the avocado-green toilet and bathtub. You can’t wait to shower in a spa-like setting with clean tiles and a double sink to save your marriage. However, you don’t have the funds readily available right now for a big renovation. So, how can you find the money to do this life-changing home improvement?
One popular option for financing home renovations and other expensive lifestyle needs is called a second mortgage. But you need to know all the ins and outs before taking on another loan because you could be signing up for a house-poor future, or even foreclosure.
Start Making Offers Without Waiting to Sell Your Home
Through our Buy Before You Sell program, HomeLight can help you unlock a portion of your equity upfront to put toward your next home. You can then make a strong offer on your next home with no home sale contingency.
What is a second mortgage?
A second mortgage is a second secured loan that you can take out as a homeowner, using your house as collateral. As its name indicates, the second mortgage is in a secondary lien position behind your primary, or “first mortgage.” That means that if you were to default on your mortgage and your home goes into foreclosure, your first mortgage gets paid from the foreclosure sale first, and the second mortgage only gets paid off if there are sufficient proceeds remaining from the sale after the first mortgage is paid.
“Most second mortgages offer shorter loan terms, usually 10 or 15 years,” says Richard Monley, Vice President of the Retail Lending Division of Hawthorn Bank in Lee’s Summit, Missouri. Monley formerly served as president of the Mortgage Bankers Association of Greater Kansas City.
He explains that the interest rate can be fixed or adjustable. Adjustable rates typically start out lower than fixed rates but will go up after a certain period of time. Rates on second mortgages also normally start higher than a first mortgage rate, partially because the lender will not earn as much interest income over the shorter-term life of the loan, but primarily because there is higher risk attached to a second mortgage.
When can you get a second mortgage?
There are two scenarios where you can get a second mortgage:
- As a homeowner, borrow against the value you already own in the home.
- As a buyer, use a piggyback second mortgage loan to make a larger down payment.
All that said, if circumstances change and you can’t pay that new loan, you could put yourself at risk of foreclosure and losing your house.
Common uses for a second mortgage
Because a second mortgage allows you to tap into the equity you’ve built in your home, it can provide a substantial source of cash when you need it most. And while the funds are secured by your property, you have a lot of flexibility in how you actually use that money.
“People usually set up a home equity line of credit or get a second mortgage so they can make improvements on their homes or pay off bills,” says Monley.
Here are the most common ways homeowners utilize a second mortgage to achieve their financial goals.
Home improvements and renovations
Investing back into your property is another incredibly popular path, whether through overhauling an outdated kitchen, upgrading your outdoor living space, building a swimming pool in your backyard, or adding some extra square footage to your home. Major renovations can significantly increase your home’s overall market value and your everyday quality of life.
If you are planning a massive, multi-stage renovation, utilizing a Home Equity Line of Credit (HELOC) as your second mortgage can be incredibly useful. A HELOC allows you to draw funds incrementally as different phases of the project wrap up, meaning you only pay interest on the money you’ve actually spent so far.
Debt consolidation
Although the money is loaned using your home as collateral, you are under no obligation to spend it on the house. One of the smartest ways to use a second mortgage is to get a handle on high-interest debt. If you are juggling multiple credit card balances or personal loans, you are likely losing a lot of money every month to double-digit interest rates.
By taking out a second mortgage at a significantly lower interest rate, you can pay off those high-interest accounts entirely. This consolidates your debt into a single, predictable monthly payment, simplifies your personal finances, and can substantially reduce the total amount of interest you pay over time.
Covering large expenses
Life comes with major milestones and unexpected twists, both of which often carry a hefty price tag. When you are facing significant financial needs that require a large lump sum of cash, a second mortgage can bridge the gap. Homeowners frequently use these funds to cover sudden medical bills or manage essential, large-scale family expenses.
Some of the other reasons people get a second mortgage is to “fund a large purchase such as a car or even pay college tuition,” Monley says.
Ultimately, whether you are trying to invest in your child’s future education or pay off an auto loan, tapping into your home equity offers a powerful financial tool to manage life’s biggest expenses.
Who qualifies for a second mortgage: Eligibility requirements
To qualify for a second mortgage, lenders will evaluate your financial stability much like they did for your original home loan. Because the second mortgage is secured by your home, lenders primarily focus on how much equity you have built, your ability to manage additional debt, and the fair market value of your house.
Key eligibility factors include:
- Sufficient home equity: Lenders require you to have built up enough equity in your home. Typically, you can borrow against 80% to 85% of your home’s current fair market value, minus the balance remaining on your first mortgage.
- Credit score: Your credit score is a major factor in determining your eligibility and interest rate. While specific requirements vary by lender, a higher score generally helps you qualify for more competitive rates.
- Debt-to-income (DTI) ratio: Lenders review your DTI to ensure you can comfortably handle the payments for both your primary and second mortgage. They will look at your total monthly debt payments against your gross monthly income.
- Stable income and employment: As with any loan, lenders need proof that you have a steady, reliable income to support the new monthly payments.
- Property appraisal: Lenders will often require an appraisal to confirm the current fair market value of your property, which determines your total borrowing limit.
Types of second mortgages
If you own a home and want to take out a second mortgage, you’ll be leveraging the built-up equity in your home. Two of the most popular options for secondary mortgages are a home equity loan and a home equity line of credit (HELOC). Here are the options to consider:
Buy Before You Sell
If you’ve recently stumbled upon the home of your dreams and are looking to buy before selling your current place, HomeLight’s Buy Before You Sell (BBYS) program offers a streamlined solution.
The BBYS program lets you tap into your existing home’s equity quickly — often within 24 hours — allowing you to make a strong, non-contingent offer on your next home without any upfront fees or commitment. This method eliminates the stress of multiple moves, and could even save you money on temporary housing or renting a storage unit.
HomeLight charges a 2.4% flat fee on your old home’s final sale price. If your home isn’t sold within 90 days after your new home purchase, HomeLight will buy it and handle the sale. After deducting any related costs, profits from the sale will be returned to you.
Home equity loan
With a home equity loan, you’re taking out a specific total loan amount based on the amount of equity you’ve built in your property. A home equity loan is issued to the homeowner in one lump sum, which homeowners typically pay back at a contracted rate of interest, similar to the repayment on a standard first mortgage loan.
Home equity line of credit
With a home equity line of credit, instead of a lump sum payment, a lender sets a borrowing limit based on your home’s equity. You can draw the funds as you need them, though you won’t get the money until you request it.
HomeLight Home Loans also provides a way to access up to $500K from your home’s equity in minutes. The Card by HomeLight Home Loans gives you instant access to your home equity at rates significantly lower than traditional credit cards. Simply complete the application in 2 minutes, see potential HELOC options available to you, and start using the card to tap into your home equity.
Piggyback loans (80/10/10)
If you don’t have 20% down payment to put down when buying a home, your lender wants more protection in case you default on the loan. If you have less than 20% to put down, your lender will likely require you to purchase private mortgage insurance (PMI). This is an additional fee you’ll pay in order to get a loan with less than 20% down. A 20% down payment can be tough to scrape together in many markets (remember, we’re talking $60,000 on a $300,000 home for 20% down).
A piggyback loan is a second mortgage used to purchase a home so that buyers can avoid PMI and secure a lower interest rate on their first mortgage, says Monley.
Piggyback loans are often called 80-10-10 loans because the buyer takes out the first mortgage for 80% of the home’s value, a second mortgage for 10% of the home’s value, and then the buyer kicks in the final 10% on the loan as a down payment.
That means for a $200,000 home, you only have to come up with $20,000 for a down payment, and the piggyback loan for $20,000 will get you to $40,000 and 20%.
“Eighty-ten-ten loans are structured as two mortgages with a down payment,” explains Monley. “The first number always represents the primary mortgage, the middle number represents the secondary loan, and the third number represents the down payment.”
The piggyback loan is taken out at the same time as your main mortgage.
Second mortgage types: Comparing the pros and cons
| Best For | Pros | Cons | |
| HomeLight Buy Before You Sell | Homeowners who plan to buy a new home before selling their current home. | Streamlined transition allows you to move before selling, avoiding the hassle of temporary housing.
Enables non-contingent offers, significantly increasing your buying power in competitive markets. |
Involves a 2.4% flat fee on the final sale price of the old home.
Program availability and specific home equity requirements apply. |
| Home Equity Loan | Homeowners who want to borrow against their home equity for major expenses. | Lower interest rates compared to credit cards or personal loans.
Access to large borrowing amounts for major expenses like renovations or debt consolidation. Interest paid may be tax-deductible if used for substantial home improvements. |
Potential for long-term debt with repayment periods of 10-30 years.
Involves upfront fees and closing costs (e.g., appraisals). Risk of becoming “underwater” if property values decline. |
| HELOC | Homeowners who want flexibility in accessing their home equity. | Flexibility to draw funds as needed, similar to a credit card.
Typically offers lower interest rates than unsecured debt. |
Risk of foreclosure if payments aren’t made.
Often features adjustable interest rates that can increase over time. Can be “balloon notes” where the full balance may become due at the end of the term. Risk of overspending due to the revolving line of credit nature. |
| Piggyback loans | Homebuyers who need additional funding to cover a 20% down payment. | You won’t have to pay mortgage insurance when buying a house.
Mortgage interest on piggyback loans is tax-deductible in some cases (up to $100,000). A piggyback loan could also be used to avoid having to qualify for a “jumbo” loan, which often have more stringent underwriting requirements. |
Between interest and closing costs, you could end up paying more for your house over the lifetime of the loan.
You may have to pay two sets of closing costs. Your second loan will likely have a higher interest rate. You have to go through two loan closings at the same time. |
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Taking out a second mortgage on a home you own
If you’ve already owned your home for a while, you can take out a chunk of money from its equity to do whatever you need to do in your life.
What is home equity?
You begin building equity in your home when you take out your first mortgage.
When you buy a house, unless you’re getting a loan with 0% down (which you can do under certain government-backed programs, such as VA and USDA loans), you have to bring some money to the table — a down payment. So when the home first transfers ownership from the seller to you, your equity in the home is equal to the down payment amount.
For example, if you buy a home for $300,000 and put down $15,000, you have 5% equity in the house, and you owe your mortgage lender $285,000, or 95% of the home’s value.
How do you build home equity?
Building home equity happens organically as you own your home in two fundamental ways.
Making mortgage payments
Monley suggests that homeowners pay more than the minimum payment each month toward the principal balance on their mortgages. As you make mortgage payments and pay down your principal, your equity increases, and the amount of money you owe the lender decreases, so you can build equity by paying off your mortgage faster.
If you bought your house for $300,000, then for every $3,000 you pay toward your loan principal balance, you will gain 1% equity in your home … assuming home values remain stable.
Your home’s value increases
Another way to build equity is out of the homeowner’s control because it involves the real estate market. As your home’s value increases, you will accrue more equity in the property because it’s worth more than it was when you bought it, and that additional value “belongs” to you as the homeowner.
For example, let’s say the home you bought for $300,000 with $15,000 (5%) down has increased in value by $30,000 during the first five years you’ve owned it, and you’ve also managed to pay off $15,000 of your loan’s principal balance.
Between the $15,000 down payment and the $15,000 loan payoff, you now have accrued 10% in loan equity through your own efforts. And because home values have also increased by $30,000 (10%) in that time, you actually have a full 20% equity in your home now because you also “own” the increase in property value.
Want to figure out how much your home is worth? Using HomeLight’s free Home Value Estimator (HVE), you can get a ballpark initial value in less than two minutes. While most online home valuation tools pull from the same sources (think public records, recent home sales, and user-submitted information), HomeLight refines its estimates with a seven-question quiz to learn more about your property.
Mortgaging your earned equity
Once you’ve built equity in your home, you can use a second mortgage to “liquidate” that equity (an investor’s word for “turning your equity into cash”) so that you can spend it. Second mortgages are a way for you to tap into your investment without having to sell your home.
Remember, you can only get a second mortgage for the amount of equity in your home — you won’t be able to get a second mortgage for more than the value of your home’s equity.
And understand that you won’t necessarily be able to borrow all your equity, either. The amount you borrow is usually limited to between 80% and 85% of your equity in the property’s current market value, minus any money you still owe on your first mortgage.
Rates and terms
Rates and terms refer to the specifics of your second mortgage — how much interest you’ll pay and how long it will take you to pay back the loan.
Your second mortgage’s interest rate will be based on your credit score and current market rates. Just like a first mortgage, you can often tweak the loan terms (how long it takes to pay back the loan) to suit yourself. Remember, with second mortgages, loan terms are typically shorter than with a first mortgage; 10 or 15 years is more standard than 15 or 30.
Other factors to consider with a second mortgage
A second mortgage is another loan you’ll have to pay back on top of your first mortgage payment. If a homeowner defaults on either loan, the lender for the second mortgage can begin foreclosure proceedings — but whether or not it will actually foreclose depends largely on the value of the property in the current market.
If the owner has some equity in the home, then the second-mortgage lender is more likely to foreclose because they are more likely to reclaim at least some of the money loaned.
If the owner owes more on both the first and second mortgage than the house is worth, however, then the second mortgage lender might decide not to foreclose. They’ll make this decision because the likelihood that they’ll reclaim any of their investment is lower; proceeds from the foreclosure sale will be applied to paying off the first mortgage completely before any proceeds can be claimed by the second mortgage lender … so it won’t always be in that mortgage lender’s best interests to foreclose.
Whenever you take out a mortgage, make sure to choose the right lender. Some lenders might charge additional fees or higher rates than others. When you begin prequalifying for a mortgage loan, ask several lenders to send you a Loan Estimate, which breaks down terms and fees in a clear and easy-to-compare format. On the second page of the Loan Estimate, you’ll find “Loan Costs” and “Other Costs.”
Loan costs will show you an itemized list of fees and services so you can compare the price of each item from lender to lender. The other costs will include homeowners insurance premiums; take a look and compare these, too, to make sure you’re not being charged for anything extraneous or unnecessary.
If you’re using your second mortgage to make substantial improvements to your home or certain other activities, then you’ll be able to deduct your second mortgage loan interest on your taxes.
“I would tell people to use caution about the equity that they have in their house,” says Emma Payne, a top-selling real estate agent in Sussex County, Delaware, who has worked in the business for more than 45 years.
A second mortgage could improve your life — maybe you pay off your credit cards or build an amazing backyard pool for entertaining. But you’ll still have to pay your second mortgage back, along with your first mortgage. If you’re curious about the current value of your home and how to leverage its equity to purchase a new property, HomeLight provides helpful tools and programs to guide you.
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