What Is a Second Mortgage?

A second mortgage is a loan secured by your home while another loan secured by that same home is still outstanding. It is also called a junior lien because, if the home is sold to repay debts, it gets paid only after the first mortgage. Home equity loans and home equity lines of credit (HELOCs) are the most common types.

What "second" really means

The word "second" does not describe when you took out the loan or how big it is. It describes lien position, which is the order in which lenders get repaid from the home's value if the home is sold through foreclosure or to settle debts.

When you buy a home with a mortgage, that lender usually records the first lien. If you later borrow against your equity while that mortgage is still in place, the new lender's claim is recorded behind it. The first lender is repaid first. The second lender is repaid from whatever is left.

A loan's position can change. If you pay off your first mortgage completely, your home equity loan or HELOC can move into first position. On the other hand, if you refinance your first mortgage, the second lender may need to agree to stay in second position, a step often called subordination.

Why lien position matters to you

Because the second lender is repaid last, it takes on more risk. If your equity is not enough to cover both loans, the second lender may not recover everything it is owed. That added risk is why second mortgages often carry higher interest rates than first mortgages.

Lien position also affects you in practical ways:

• Refinancing. If you want to refinance your first mortgage and keep the second, the second lender's cooperation is usually needed. That can be difficult if home values have fallen or payments are behind.
• Selling. When you sell, both loans generally need to be paid off from the sale. If values drop, paying off two loans can be harder.
• Total debt. A second mortgage adds a second monthly obligation on top of your first mortgage, which makes your budget more sensitive to income changes.

Types of second mortgages

Second mortgages come in two basic structures, closed-end and open-end, and several common uses.

Home equity loan (closed-end)

A home equity loan pays out the full amount at closing. You repay it in regular installments, and you cannot borrow more from that same loan once it is paid out. The rate may be fixed or adjustable. Borrowers often use this type for a single, known expense.

Home equity line of credit (open-end)

A HELOC sets a maximum credit limit. During the draw period you borrow what you need, repay it, and can borrow again. When the draw period ends, you repay the balance, either over a schedule or, in some plans, as a single balloon payment. Most HELOCs have variable rates tied to an index plus a margin, so payments can change.

Piggyback second mortgage

A piggyback second mortgage is a home equity loan or HELOC taken out at the same time as the main mortgage, usually when buying a home. Some buyers have used this structure to keep the first mortgage below the level that would normally require mortgage insurance. It is less common than it once was, and it has drawbacks: the second loan often has a higher rate that may be adjustable, and a single loan with mortgage insurance may cost less overall. Compare both approaches before choosing one.

Second mortgage vs. cash-out refinance

A second mortgage is not the only way to tap equity. With a cash-out refinance, you replace your current mortgage with a new, larger first mortgage and receive the difference in cash. You end up with one loan instead of two.

A second mortgage leaves your first mortgage untouched. That can matter if you like the terms on your existing loan and would rather not replace them. A cash-out refinance, by contrast, resets your entire balance under new terms and usually involves closing costs on the full new loan. Which one makes more sense depends on your existing loan, how much you need and the costs of each option.

Common reasons people take out a second mortgage

• Paying for home repairs or improvements
• Consolidating higher-cost debt into one payment
• Covering large expenses such as education or medical bills
• Keeping a flexible line available for uneven or unexpected costs

Some uses deserve extra caution. Using home equity to pay off credit cards or other debts does not erase that debt. It moves it onto a loan secured by your home. The lower rate comes from that collateral, and stretching short-term debt over a longer period can cost more in total. If spending habits do not change, it is possible to end up with both new card balances and a second mortgage.

Risks to understand before you borrow

• Your home is collateral. If you cannot repay a home equity loan or HELOC, you could lose your home, even if your first mortgage is current.
• More total debt. A second payment leaves less room in your budget if your income drops or expenses rise.
• Rate changes. Variable-rate second mortgages can become more expensive over time.
• Less equity cushion. If home values fall, you may owe more than the home is worth, which can make selling or refinancing difficult.

Also keep track of any second mortgage you have, even if you have not heard from the servicer in a while. A second loan can remain a lien on your home until it is paid off or released, so keep your statements and payoff records.

What lenders typically look at

Every lender sets its own standards, and programs vary by borrower, property and investor. In general, expect a lender to review:

• How much equity you have, based on your home's value and your current mortgage balance
• Your credit history
• Your income and your other monthly debts
• The property itself, often through an appraisal or other valuation

Any offer is subject to credit approval.

How to shop for a second mortgage

Get written terms from more than one lender and compare them side by side. Ask about the rate type, how and when any rate can change, upfront fees, ongoing fees, prepayment or early closure fees, and whether the loan could end in a balloon payment. For HELOCs, ask about the length of the draw and repayment periods and the conditions under which the lender can freeze or reduce your line.

For many second mortgages on your principal residence, federal law gives you a short window after closing to cancel for any reason by notifying the lender in writing. If you are already having trouble with your first mortgage, talk with a HUD-approved housing counselor before taking on a second one.

Frequently asked questions

Next steps

• Second Mortgages
• Home Equity Loans

Sources

• CFPB: What is a second mortgage loan or junior lien?
• CFPB: What is a piggyback second mortgage?
• CFPB: What is the difference between a home equity loan and a HELOC?
• CFPB: What you should know about home equity lines of credit
• CFPB: What other types of loans are similar to a HELOC?