Are you in need of funds to complete home repairs or renovations? Or perhaps you’re interested in paying off high-interest credit card debt with a comparatively low-interest loan to save money in the long term?

In either case, if you own a home, a second mortgage can give you access to quick cash.

What Is a Second Mortgage?

A second mortgage is a loan taken out on a home that already has an existing mortgage. With a second mortgage, you can borrow against your home equity to access cash. Home equity is the value that you own in your home, which is the difference between your home value and your current mortgage balance. For example, if your home is worth $600,000, and you still have a balance of $200,000 to pay on your home loan, you have $400,000 in equity.

The purpose of a second mortgage is to allow homeowners to tap into their home equity when they need money. A second mortgage can be used to:

  • Cover large expenses (like emergency medical bills or vehicle repairs, for example)
  • Fund home renovations or repairs
  • Pay off high-interest debts with a lower-interest loan
  • Free up capital for the down payment on an investment property
  • Pay for college

Second mortgages can offer a lower-cost option for homeowners than private loans or credit cards[1]. The reason second mortgages generally offer lower interest rates is because they are secured by real estate. This allows the mortgaged property to be used as collateral for the loan. That way, if the borrower defaults the lender could foreclose on the property[1].

Terms for second mortgages can vary depending on the type of loan taken. You might choose a one-year second mortgage for a small amount that you can repay quickly, or choose a 20-year second mortgage for a more substantial loan amount.

How Does a Second Mortgage Work?

Your home may be your most valuable asset. In fact, you may have more value in your home than in any cash reserves you can access. A second mortgage allows you to access some of the wealth you have tied up in your home.

What does it mean to take out a second mortgage? It means to borrow against the value you own in your home so that you can convert home equity into cash as needed.

Here’s how a second mortgage works:

If you qualify for the second mortgage, similar to your primary mortgage, the lender places a lien against the property, which means that the lender has an ownership claim to the property in the event that you fail to repay the loan. Once the second mortgage loan is repaid, the lien is removed.

The amount available for borrowing depends on the equity in the home. Many lenders prefer that homeowners retain at least 20% equity in their homes[2]. For example, if your home is worth $600,000, you must retain at least $120,000 in equity. So, if you still have $200,000 to pay on your primary mortgage, the most you can borrow with a second mortgage is $280,000 ($600,000 value minus $200,000 in current debt minus $120,000 in retained equity). However, some lenders may require homeowners to retain a higher percentage of equity. And the amount you can borrow may depend on other factors, such as the payment history on your primary mortgage and your credit score.

Regardless of how much a lender is willing to loan, the FTC advises that homeowners only borrow what they need rather than borrowing as much as possible[2].

Types of Second Mortgages

There are two types of second mortgages: home equity loans and home equity lines of credit (HELOCs)[2].

Home Equity Loan

Home equity loans are lump-sum draws against equity. You can apply to receive a specific amount of money in a single transfer of funds. This amount is then available in your bank account to use as needed.

Home equity loans are typically fixed-rate, meaning that the interest rate is pre-determined and does not change over the loan term[2]. With a home equity loan, you have a set repayment schedule. This makes it easier to budget because you know exactly how much is due and when.

Home Equity Line of Credit

HELOCs are revolving credit lines that allow you to borrow in increments rather than in a lump sum. HELOCs are often compared to credit cards because both offer an open line of credit that you can charge for purchases. In fact, some HELOCs come with a card so that you can conveniently charge purchases to your home equity line of credit.

Unlike home equity loans, HELOCs are typically (although not always) adjustable-rate loans. This means the interest rate fluctuates to reflect current market rates[2]. This can make it more difficult to budget for the loan repayment, but the flexibility of pulling cash in increments may offset the extra budgeting challenge.

When to Use a Home Equity Loan and When to Use a HELOC

Using a home equity loan generally makes sense when you know the exact amount you need to borrow. If, for example, you have credit card debt totaling $15,000, you might take out a $15,000 home equity loan to pay off the credit cards in full. Then you can repay the home equity loan based on the schedule outlined in your loan documents.

If, on the other hand, you are unsure about how much you’ll need, a HELOC might make more sense. Take a home renovation, for example. Even with careful planning, estimated project costs can often prove to be inaccurate. A HELOC would allow you to borrow the amount needed for the initial materials and labor. Then, if you find that additional materials are needed, or if you decide to extend the scope of the renovation, you can easily borrow more.

To learn more about the differences between home equity loans and HELOCs, read PNC’s article, HELOC vs. Home Equity Loan.

It is important to note that other factors, such as the potential for interest rate fluctuation, should be considered. For example, if interest rates are projected to increase, you might choose a fixed-rate home equity loan over an adjustable-rate HELOC. Because of the different factors to consider, you may want to contact a lender to discuss which option would work well for your unique circumstances.

The Difference Between a Second Mortgage and a Refinance

Many homeowners are confused about the distinction between a second mortgage and a refinance.

While a second mortgage is an additional loan taken out on a property that already has a current mortgage, a refinance is when the current mortgage is replaced by a new mortgage with new terms. Interestingly, refinancing is another option for tapping into your home equity. With a cash-out refi, you can replace your current mortgage with a new mortgage of a higher amount and pocket the difference[3].

If, for example, you have a home worth $600,000 and a mortgage balance of $200,000, you might choose to refinance your current mortgage with a new $300,000 mortgage. This would give you $100,000 in cash from the refi.

When to Use a Second Mortgage and When to Use a Cash-Out Refi?

Refinancing is a good option for pulling cash out of your home when the terms on your new mortgage could be better than those on your existing mortgage. As an example, if your current mortgage has a fixed rate of 7%, and you can refinance at 6%, a refinance might make more sense than a second mortgage.

However, a second mortgage might make more sense if the interest rate on your existing mortgage is lower than the currently available rates.

It is also worth noting that the fees for a second mortgage may be lower than those for a refinance. And a second mortgage may be easier and faster to secure than a refinance. If you are unsure about which option would be a better fit for your situation, contact the PNC Home Equity Support Team for assistance.

Pros and Cons of a Second Mortgage Loan

Second mortgages come with advantages, but there are a few potential disadvantages to be aware of as well.

The Benefits of a Second Mortgage

The advantages of a second mortgage include:

  • Access to funds from your home equity
  • Lower interest rates than many unsecured loans, like personal loans and credit cards
  • Greater convenience over solutions like cash-out refinancing, which requires your primary home loan to be replaced with a new loan

The Potential Downsides of a Second Mortgage

Before taking a second mortgage, consider the potential disadvantages:

  • As with any other loan, there is a cost of borrowing money. You need to pay interest on the amount borrowed and any fees charged to process or originate the loan.
  • Also, as with other loans, taking a second mortgage increases your debt. This might temporarily reduce your credit score or make it harder to get another loan (like an auto loan, for example).
  • Because second mortgages are secured by your home, defaulting on the loan could result in property foreclosure. This means that your lender would be entitled to seize possession of the property if you failed to make the payments.

Second Mortgage Rates

Mortgage interest rates for second mortgages are typically higher than the current going rates for primary mortgages. This is because the holder of the secondary mortgage lien is taking more risk than the holder of the first mortgage lien. In the event of a default, the primary mortgage lien holder has priority over the secondary lien holder, so the primary lien holder would be compensated first from the foreclosure proceeds.

Having said that, second mortgage rates may still be less than other loan types, making them a favorable alternative to higher-interest loans like credit cards or personal loans.

What You Need to Apply for a Second Mortgage

The requirements for a second mortgage vary by lender, but borrowers can expect to need:

  • Substantial equity in the home to borrow against
  • A good credit score to confirm that the borrower knows how to handle debt responsibly
  • A history of on-time payments on the primary mortgage
  • Proof of income to show that the borrower is likely to be able to repay the loan

The Bottom Line

If you have substantial equity in your home, you may be able to convert that equity into cash through a second mortgage. A second mortgage can provide access to funds with potentially more favorable terms than other loan types.

Second mortgage options include home equity loans, which provide a lump sum payout, and home equity lines of credit, which offer a revolving line of credit that you can make draws as needed. Home equity loans are well suited to borrowers who know how much money they need, and HELOCs work well for borrowers who prefer the flexibility of incremental draws on the loan.

Alternatively, you might consider a cash-out refinance if current interest rates are lower than the interest rate on your existing mortgage. However, if interest rates have remained stable or increased, a second mortgage could potentially cost less in fees and take less time to process than a refinance.

Regardless of which option you choose, it is crucial to consider both the benefits and possible disadvantages before taking out any loan, particularly one that uses your home as collateral, as all mortgages do. Contact the PNC Home Equity Support Team for a review of your options with a loan expert so that you can make a well-informed decision about whether a second mortgage is the right choice for you.

The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.