All You Need to Know About Second Mortgages and Tapping Into Home Equity
With home prices climbing steadily for nearly two years straight, American homeowners are sitting on record levels of equity. According to property data firm Cotality, the average mortgage-holding homeowner had $303,000 in home equity by the end of 2024—a historic high. That wealth, locked in the walls of your home, could be a valuable source of cash.
Whether you’re planning a major home renovation, paying for college, consolidating debt, or starting a business, a second mortgage could be your ticket to unlocking that equity. But before jumping in, it’s essential to understand how second mortgages work—and if they’re the right financial move for you.
What Is a Second Mortgage?
A second mortgage is a loan you take out using your home as collateral—just like your original mortgage. However, instead of purchasing the home, you’re borrowing against the equity you’ve built in it.
Your existing mortgage remains in place as the “first lien.” The second mortgage is considered “subordinate,” meaning if you default or face foreclosure, your original lender gets paid first. The second lender is next in line.
You can think of a second mortgage as a way to turn your home’s equity into spendable cash—without refinancing your first mortgage.
How Second Mortgages Work
A second mortgage works similarly to your first. You’ll apply through a lender, go through credit and income checks, likely get your home appraised, and pay closing costs. Once approved, you’ll receive the funds—either in a lump sum or as a line of credit.
Most lenders will let you borrow up to 85% of your home’s appraised value, minus what you still owe on your primary mortgage. For example you have a home value of $300,000 with a balance on a first mortgage of $200,000. So if you take 85% of you home value – which is $255,000, your maximum second mortgage amount would be $55,000.
Do You Qualify for a Second Mortgage?
To be eligible for a second mortgage, most lenders require:
- 15–20% equity in your home
- A credit score of 620+ (though 680+ is recommended for better rates)
- Stable income and manageable debt levels
- A favorable loan-to-value ratio (LTV)
Can You Get a Second Mortgage with Bad Credit?
It’s possible—but not easy. Lenders typically view second mortgages as riskier than primary ones. If your credit score is below 640, you’ll likely face:
- Higher interest rates
- Stricter lending terms
- Lower borrowing limits
Your best bet might be working with your original lender, or applying with a co-signer to strengthen your application.
Pros and Cons of a Second Mortgage
✔ Pros
- Access to equity: Unlock a valuable source of funding
- Lower interest rates than personal loans or credit cards
- Flexible disbursement: Lump sum or credit line
- Potential tax deductions for home improvement-related interest
✖ Cons
- Lengthy application process, with paperwork and fees
- Two mortgage payments each month
- Limits on borrowing based on your equity
- Risk of foreclosure if you can’t repay
Types of Second Mortgages
There are a couple of types of second mortgages. A home equity loan is a fixed rate loan that has a lump-sum payment which in turns gives you a predictable monthly payment. This is perfect for a one-time expense such as debt consolidation or roof replacement. Then there is a home equity line of credit (HELOC) which works much like a credit card with a revolving credit line. You basically borrow what you need, when you need it with variable interest rates. This is a great for unpredictable expenses or ongoing expenses such as college tuition or phased renovations.
Second Mortgage vs. Cash-Out Refinance
Cash-Out Refinance:
You replace your original mortgage with a new, larger one. You receive the difference in cash. This often comes with lower interest rates but eliminates your original mortgage terms.
Second Mortgage:
You keep your existing mortgage and take out a separate loan on top of it. This is ideal if your current mortgage has a great rate you’d like to preserve.
When a Second Mortgage Makes Sense
- You have significant equity and a low interest rate on your current mortgage
- You need cash for a major life expense or emergency
- You want to avoid higher-interest personal loans or credit card debt
- You’re financially stable enough to handle a second monthly mortgage payment
A second mortgage isn’t for everyone—but for the right homeowner, it can be a powerful financial tool. With home equity at record highs, it might be the best time in years to tap into the value of your home. Still, the decision should be made carefully. Consider your ability to handle additional debt, your financial goals, and your long-term homeownership plans. Consult with a trusted financial advisor or mortgage professional before moving forward. Your home is your most valuable asset—and borrowing against it is a big deal. Make sure your plan is solid, your payments are manageable, and your goals are worth the risk.