A second mortgage is a loan that sits on top of your first mortgage, which is also secured against your home.
Getting a second loan is the main alternative to refinancing your first mortgage to withdraw more money from your home.
When getting a second mortgage makes sense
It can be a good option if you need more money but don’t want to touch your first mortgage.
It may be that your existing loan is locked into a fixed or reduced rate period, which would mean you’d have to pay a significant penalty to end the deal early and refinance.
Your first mortgage could also be more competitive than what’s available if you refinanced, which would mean it makes sense to stick with what you have.
If you have other forms of unsecured debt, for example credit card debt, a second mortgage can be a cheaper way of consolidating what you have.
As with other types of debt, if you take out a second mortgage and repay what you have you can build up your credit rating.
Types of second mortgage
A ‘home equity line of credit’ (HELOC) is the most affordable option, provided you have at least 20% equity in your home and a strong credit rating.
Typically, a bank offers you a pool of money that you can draw as much or as little from as you’d like, with the lender setting a maximum borrowing limit.
The value of the home equity loan of credit cannot exceed 65% of your property value, while the two loans combined cannot be worth more than 80% of the value of your home.
Home equity loan
Another option is getting cash in the form of a ‘lump sum’ home equity loan.
Seeing as you get all the money at once, this can be more suitable if you have to make a major purchase.
This can be more expensive than a HELOC, but still cheaper than unsecured debt.
If you take out a second mortgage you are putting your home on the line, likely your most important asset.
If you stopped paying your mortgages and ended up getting your home possessed, the first mortgage lender would get their money back first.
Consequently, second mortgages tend to have a higher interest rate, though HELOC rates are still competitive.
When taking out a second mortgage there are costs you have to take into account.
You could be charged appraisal fees, for a title search, title insurance, and legal fees – so make sure taking out a second mortgage makes sense financially before you apply.