Second Mortgages: Home Equity Loans and HELOCs

A second mortgage is any loan secured by your home that sits behind your first mortgage. It lets you borrow against your home equity, which is the difference between what your home is worth and what you owe. The two main types are a closed-end home equity loan and a home equity line of credit, or HELOC. Both put your home on the line, so it pays to understand how they work before you borrow.

Understanding lien position

When you borrow against your home, the lender records a lien, which is a legal claim on the property. Liens are generally ranked by the order in which they are recorded. Your original mortgage is usually in first position, and a second mortgage takes second position.

Lien position matters because it determines who gets paid first if the home is sold or goes through foreclosure. The first mortgage lender is repaid first, and the second lender is repaid only from what remains. Because the second lender takes more risk, second mortgages often carry higher interest rates than first mortgages, and lenders look closely at how much total debt is secured by the home.

If you later refinance your first mortgage, your second mortgage lender may need to agree to stay in second position through a process called subordination. Ask about this before you refinance.

Closed-end home equity loans

A closed-end home equity loan works much like a traditional mortgage. You receive the full loan amount in one lump sum at closing and repay it in regular installments over a set term. Many home equity loans have a fixed interest rate, which means a predictable payment.

This structure often fits a single, known expense, such as a major renovation with a firm bid or consolidating specific debts. You pay interest on the full amount from the start, so it works well when you need all the money at once.

Home equity lines of credit

A HELOC is a revolving line of credit secured by your home, similar in concept to a credit card. You are approved for a maximum amount and can draw from it as needed during a draw period, then repay what you borrowed during a repayment period. You pay interest only on the amount you actually use.

Most HELOCs have variable interest rates tied to an index, so your payment can change. During the draw period, some HELOCs allow lower payments that cover only interest, which means your payment can rise noticeably when the repayment period begins. HELOCs use Truth in Lending disclosures rather than the Loan Estimate form, so read the terms carefully.

Piggyback loans at purchase

Some buyers take out a second mortgage at the same time as their first mortgage when buying a home. This is sometimes called a piggyback loan. It can be used to reduce the size of the first mortgage, which may affect mortgage insurance or whether the first loan stays within the conforming loan limit. Compare the combined cost of both loans with a single-loan option before choosing this route.

Common uses

• Home improvements and repairs
• Consolidating higher-interest debt
• Education expenses
• Large one-time costs, such as medical bills
• An emergency reserve, in the case of a HELOC you draw only when needed

Interest on home equity debt may be tax-deductible in some situations, depending on how the money is used. Talk to a tax professional before counting on any tax benefit.

Risks to weigh

• Your home is collateral. If you cannot repay, you could lose your home to foreclosure.
• Payments can change. Variable-rate HELOC payments can rise, and the shift from draw to repayment can increase payments.
• Home values can fall. Borrowing against equity leaves less cushion, and a lender may freeze or reduce a HELOC if values drop.
• Debt can shift, not shrink. Consolidating credit cards into home equity debt only helps if you avoid running the balances back up.
• Costs add up. Appraisal, closing costs, annual fees and early closure fees may apply depending on the loan.

Second mortgage vs. cash-out refinance

A cash-out refinance replaces your first mortgage with a new, larger one and gives you the difference in cash. A second mortgage leaves your first mortgage in place. If your existing first mortgage has terms you want to keep, a second mortgage may make more sense. If you want to change your first mortgage anyway, a cash-out refinance may be worth comparing. Ask a lender to show you both.

Your right to cancel

When you take out a second mortgage or HELOC on your primary home, federal law generally gives you a short window after closing to cancel the loan, called the right of rescission. Your lender must give you a written notice explaining this right and how to use it.

Getting started

Estimate your home's value and current loan balance, decide what you need the money for and whether you need it all at once, and request offers from more than one licensed lender. All loans are subject to credit approval, and eligibility varies by borrower, property and investor.

Second Mortgages by state

• Second Mortgages in Florida
• Second Mortgages in New York
• Second Mortgages in New Jersey
• Second Mortgages in Pennsylvania
• Second Mortgages in Connecticut
• Second Mortgages in Virginia

Related guides

• What Is a Second Mortgage?
• HELOC vs. Home Equity Loan: Which Way to Tap Your Equity
• Cash-Out Refinance vs. HELOC: Choosing How to Use Your Equity