Second mortgages explained

^{This article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer home equity loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.}

Quick insights

• A second mortgage lets you borrow against your home equity without disturbing your primary mortgage.
• Whether you choose a home equity loan, HELOC or piggyback loan, each has its own benefits and drawbacks.
• Second mortgages and cash-out refinances both unlock your home equity in different ways.refinance-hl000061

For many homeowners, home equity is a valuable resource they can use to further a wide range of financial goals, including home renovation, consolidating high-interest debt or investing in real estate. One way to access your home equity is with a second mortgage. Understanding how a second mortgage works and the types of options available is an important first step.

What is a second mortgage?

A second mortgage uses your home as collateral and is usually taken out after your primary or first mortgage. This is different from taking out a mortgage on a second home. If you default on the second mortgage, the lender has the option to foreclose on the home to collect what they’re owed.

The second mortgage doesn’t replace your primary mortgage. It’s an additional loan with its own repayment terms and repayment schedule. The term second mortgage also dictates the order in which lenders can make a claim on your home. If you fail to pay both your loans, the primary mortgage lender gets priority in foreclosing on the home.

How does a second mortgage work?

When you take out a second mortgage, you’re borrowing against the available equity in your home. This can be calculated by subtracting the amount you currently owe on your primary mortgage from the appraised value of the home.

For example, if you own a home valued at $350,000 and owe $200,000 on your current mortgage, you would have $150,000 in total equity you could potentially borrow against.

However, while you may have $150,000 in equity, most lenders prefer you don’t use all of your available equity. This way, the home retains some value in case it becomes necessary to sell or foreclose. While every lender is different, this usually ranges from 80%–90% of your home’s value,3 often represented as the loan-to-value (LTV) ratio.

Continuing the example above, let’s say you have a home valued at $350,000, and your lender allows you to borrow against 90% of your LTV. If your home is worth $350,000, this means you could borrow against no more than $315,000. So instead of $150,000, you’d have $115,000 in available equity after you repay the $200,000 owed on your mortgage.

How do second mortgage interest rates compare to primary mortgage loans?

Because your primary mortgage takes priority in the event of a default, second mortgages are seen as higher-risk and often come with higher interest rates. However, a second mortgage still tends to offer better interest rates than personal loans or credit cards.

What types of second mortgages are there?

There are several types of second mortgages, each with its own structure, benefits and ideal use cases. Let’s break them down:

Home equity loan

A home equity loan pays a lump sum upfront that’s repaid over a fixed term, usually with a fixed interest rate and fixed monthly payments. Repayment usually starts immediately, and repayment terms can range from 5–30 years.ec-cbsnews-equity_may03

Home equity loans may be used for debt consolidation or a large one-time expense, like a down payment on a second home or investment property.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a revolving credit loan, like a credit card. Instead of a credit limit, the amount you can borrow is based on the approved line limit. Also, like credit cards, your interest rate can be variable, so your monthly payments may fluctuate.

With most HELOCs, you can make draws on your credit as needed during a “draw period,” which can range from 5–10 years.ec-fix-adj-arm-jan-25ec-fix-adj-arm-jan-25 During this time, you may need to pay a monthly service fee and cover interest on money you’ve borrowed. If you pay back some or all of the principal, you can continue to draw on the available line amount.

After your draw period ends, you enter a “repayment period,” usually between 10–20 years, where you make regular monthly payments to repay what you borrowed, plus interest.ec-fix-adj-arm-jan-25

HELOCs may be used for ongoing expenses, like renovations and repairs, college tuition or medical bills. In some cases, a HELOC can also act as an emergency fund.

80/10/10 loans or piggyback loans

Unlike home equity loans and HELOCs, an 80/10/10 loan or piggyback loan is a second mortgage you take out at the same time you take out your primary mortgage on a home.

The idea is that you use your primary mortgage to pay for 80% of your home/s value, take out an additional loan to cover 10% of the home’s value and then make a down payment of 10%.

Using an 80/10/10 loan may make sense as a way to avoid having to pay for private mortgage insurance (PMI) on a loan. It may also be an alternative to a jumbo loan if you’re planning to borrow more than the conforming loan limits (CLLs) for your area.

Please note: Chase does not offer piggyback loans at this time.

How do you apply for a second mortgage?

Applying for a second mortgage is similar to applying for your first mortgage. You’ll need to:

• Submit an application: This is a standard mortgage application that asks basic questions about your income, assets and how much you’d like to borrow.
• Provide necessary documents: The lender will require information such as proof of income and employment as well as a credit history.
• Go through the home appraisal process: The lender may also require a home appraisal to determine the current fair market value of your home. This may be a desktop appraisal based on comparable home prices, or it may require a physical inspection of your home.
• Review your loan estimate: Once the lender has gathered the necessary information, they’ll provide you with a loan estimate detailing the terms and conditions of your second mortgage.
• Close your home equity loan: Your loan will go through an underwriting process to confirm your financial status. Then, you’ll simply need to sign the necessary documents, and you’ll be able to access the funds for your second mortgage.

Second mortgage vs. cash-out refinance

Another popular way to borrow against your available equity is with a cash-out refinance. Instead of taking out a second mortgage, you take out a brand new primary mortgage and borrow more than the current balance of your current mortgage.

Like second mortgages, you may only be able to borrow against a percentage of your home’s current LTV.

Keep in mind, both second mortgages and cash-out refinances charge you for closing costs. Because these are usually based on the value of the loan, you’ll pay more in closing costs with a cash-out refinance.

What are the pros and cons of a second mortgage?

Before taking out a second mortgage, it’s important to consider the pros and cons compared to other forms of financing.

Pros of a second mortgage

• Ability to borrow more money: With a second mortgage, the amount you can borrow is only limited by the amount of available equity.
• Lower interest rates: While second mortgage interest rates may be higher than a primary mortgage, they may be lower than the interest rates for credit cards or personal loans.
• Can be used for multiple purposes: A second mortgage can be used for any purpose. Some lenders may even offer a lower interest rate if you use it to refinance higher-interest debt.
• Tax benefits: The mortgage interest you pay on a second mortgage may be tax deductible if you use it to repair your current home or to buy or build a new home. You may want to consult a tax professional.

Cons of a second mortgage

• Risk of foreclosure: If you were to borrow money using an unsecured loan, like a credit card or personal loan, and were unable to make your payments, there would be potential legal consequences and your credit would take a hit—but you wouldn’t lose your home.
• More than one mortgage payment: Like your primary mortgage, it’s important to stay on top of your second mortgage payments. Otherwise, you risk foreclosure. Setting up automated payments is a good way to make sure your payments arrive on time and in full.
• Closing costs: When you take out a second mortgage, you’ll need to pay for closing costs, such as an origination fee and appraisal. These can add to the overall cost of borrowing.
• More time to process: While credit cards and personal loans can often be authorized within a few days, a second mortgage can take up to a month or more to process depending on your application and your lender.

In summary

If you have available home equity, a second mortgage can be a great way to access the money you need to meet financial goals, like improving your home, consolidating debt or investing in real estate. However, it’s important to make sure your budget can accommodate an additional monthly payment. Talking to a home lending expert can help determine if a second mortgage is right for you.