Ultimate Guide to Second Mortgages

If you need cash to help with big expenses like home repairs, college tuition, or paying off high-interest debts, a second mortgage could be your solution. 

What is a second mortgage? It’s a loan that lets you borrow money against your home’s equity — the difference between its value and what you owe on your current home loan. With a second mortgage, you can turn that equity into cash you can use now (without selling your house). 

In this guide, we’ll break down exactly what these loans are, how they work, and the different types of second mortgages available to you. 

Key takeaways 

• A second mortgage is an additional home loan that leverages your home’s equity for cash. 
• Applicants typically need at least 15% to 20% equity to qualify for a second mortgage on a home. 
• Lenders also typically look for a 620-plus credit score and debt-to-income (DTI) ratio of under 43%. 
• Two types of second mortgages include home equity loans and home equity lines of credit (HELOCs). 

What is a second mortgage? 

A second mortgage is a loan that lets you borrow money using your home as collateral. It’s a loan you can get in addition to your original mortgage, which is why it’s called a “second” mortgage. It also doesn’t replace your first mortgage like other refinance options. Rather, you’ll pay it back separately, usually with its own interest rate and monthly payment. 

Many homeowners use second mortgages for things like home improvements, medical bills, education costs, or high-interest debt consolidation. In fact, a recent LendingTree survey found that more than 40% of those seeking home equity loans use them for home improvements.  

Because your home is used to secure the loan, second mortgages usually offer lower interest rates than credit cards and personal loans. This is why some homeowners use second mortgages to consolidate high-interest debt. But if you can’t repay it, your lender could foreclose on your home. 

How does a second mortgage work? 

As you pay down your mortgage and the value of your home (hopefully) goes up, you grow equity. A second mortgage allows you to borrow against this equity, either as a lump sum of cash or a line of credit that you can access as needed. 

Because your home is used as collateral, lenders typically require a solid credit score and a decent amount of equity — usually a minimum of 15% to 20% of your home’s value. So, if your home is worth $300,000 and you still owe $240,000 on your original mortgage, you’d have 20% ($60,000) equity.  

Repayment terms can range from five to 30 years, depending on the type of second mortgage you get. Usually, you’ll need to decide between a home equity line of credit (HELOC) or home equity loan.  

Types of second mortgages 

Both HELOCs and home equity loans let you borrow against your home’s value, but they work in different ways. 

Home equity loans 

A home equity loan is like a traditional loan. It allows you to borrow a lump sum of cash upfront, which you repay in fixed monthly payments over a set term. A home equity loan is a good option when you know exactly how much money you need. 

Let’s say, for example, that you want to remodel your kitchen, and you’ve gotten an estimate of $30,000 for the project. With a home equity loan, you could receive that full amount upfront so you can pay the contractor and stay on budget. 

Home equity line of credit (HELOC) 

A HELOC works more like a credit card. When approved, a HELOC gives you access to a line of credit from which you can borrow as needed during a specified window of time. Called a draw period, this window usually lasts 10 years, and you only pay interest on the amount of cash you actually use until the draw period ends.  

A HELOC may be useful, for example, if you’re covering ongoing college tuition, which could span several years. These loans give you the flexibility to borrow a little or a lot, depending on what you ultimately need. 

Pros and cons of taking out a second mortgage on your home 

Any major financial move involves benefits and risk. Second mortgages are no exception. Before applying for a HELOC or home equity loan, weigh the following pros and cons: 

Benefits of a second mortgage 

• Can provide you with large amounts of cash for major expenses 
• Typically offers lower interest rates than personal loans and credit cards and can be used to consolidate high-interest debt 
• Offers fixed payments (specifically for home equity loans) that can help with budgeting 
• Comes with no requirement to refinance or give up your original mortgage 

Risks with a second mortgage 

• Adds another bill to your monthly budget 
• Uses your home as collateral if you can’t repay the loan 
• May require paying closing costs and fees 
• Typically requires at least 15% to 20% equity on your home 

When used responsibly, a second mortgage can be a powerful financial tool — not just a source of quick cash. Some smart ways to use home equity include debt consolidation, reinvesting in your property via home improvements, paying for college, or starting a business. 

Qualifying for a second mortgage 

When you apply for a second mortgage, your lender will closely analyze your finances, especially your credit history, income, and how much equity you have in your home. Here’s what they’re looking for: 

• Credit score: Most lenders want a score of at least 620. A higher score may help you secure a better rate. 
• Debt-to-income (DTI) ratio: This measures how much of your gross income (before taxes and deductions) goes toward debt payments. Lenders usually prefer a DTI under 43%. 
• Home equity: As we said earlier, lenders generally require you to have at least 15% to 20% equity in your home which is the portion of your home you own outright. 

If you don’t quite meet these qualifications, want to boost your chances of approval, or are looking for the best rates on a second mortgage, consider the following tips: 

• Pay down your existing debts to lower your DTI. 
• Check your credit report and dispute any errors you find. 
• Avoid taking on new loans or making large purchases before applying. 
• Save up for upfront closing costs, which may be required. 

How to apply for a second mortgage 

Applying for a second mortgage is a lot like applying for your first, but with a few additional steps. Here’s a quick overview of steps in the process: 

1. Check your credit and equity. Make sure you have a solid credit score and that your equity is at least 15% to 20% of your home’s value. 
2. Shop around. Compare lenders to find the most competitive rates and terms. 
3. Gather your documents. Collect income statements (i.e., W-2s or pay stubs), tax returns, and proof of homeownership. 
4. Get an appraisal. Your lender may require that you get a professional appraisal to confirm your home’s current market value. 
5. Apply, and wait for approval. Once approved and you close on your loan, you’ll receive your funds. 

Alternatives to a second mortgage 

Getting a second mortgage isn’t the only way to access cash and save funds thanks to your home’s increasing value. Depending on your needs and financial goals, the following options may offer more flexibility and better terms: 

Cash-out refinance 

A cash-out refinance enables you to replace your current mortgage with a new, larger home loan — then pocket the difference in cash. This is a popular choice when interest rates are lower than what you’re currently paying, but keep in mind a cash-out refinance resets your mortgage terms. 

Rate-and-term refinance 

Unlike the cash-out option, a rate-and-term refinance doesn’t give you cash. Instead, it allows you to change your mortgage rate and/or term, saving you money by lowering monthly payments and enabling you to pay off your loan in fewer years. 

Personal loan 

As it isn’t tied to your home, a personal loan is less risky. But interest rates are usually higher than what you’d get with a second mortgage — especially if your credit isn’t strong — making these loans more expensive over the long term. 

Explore second mortgages and more with AmeriSave 

A second mortgage can be a smart way to turn your home’s value into cash for renovations, education, debt consolidation, or other big expenses. If you’re considering a home equity loan, HELOC, or cash-out refinance, AmeriSave offers competitive rates and flexible options to fit your needs. Get started with an online quote based on how much cash you need.  

Looking to buy a home or refinance your existing mortgage? We can help with that, too. Explore our loan programs to find the right fit for your goals. 

Frequently asked questions 

Is it difficult to get approved for a second mortgage? 

This depends on your financial profile. Lenders are going to look for good credit (typically 620 or higher), stable income, manageable debt, and at least 15% to 20% equity in your home. If you meet these criteria, approval is often straightforward, yet rates and terms can vary by lender. 

What is the purpose of a second mortgage? 

Homeowners often use second mortgages to access cash for large expenses like home improvements, college tuition, or paying off high-interest debts. They offer a way to leverage your home’s value without selling or refinancing, giving you cash to use for other long-term goals. 

How do interest rates typically compare between first and second mortgages? 

Second mortgages usually have interest rates that are slightly higher than first mortgages. That’s because they carry more risk for lenders. However, the rates are often lower than those for personal loans and credit cards, making them a relatively affordable borrowing option.