Homeowners can tap into the precious equity built up into their homes by taking out a second mortgage in addition to their original home loan.

The two main types of second mortgages are home equity loans and home equity lines of credit (commonly called “HELOCs”).

Home equity loans usually have a fixed interest rate, while HELOCs often have adjustable rates.

Let’s take a look at what a second mortgage is, how it works, and how to get one from a reputable lender.

What is a second mortgage?

A second mortgage is another mortgage you take out on your home.

The difference between the first and second mortgage is that the second one borrows from the equity you’ve built up into your home.

Your home equity is the difference between what you owe on your mortgage and the current value of your home.

When your home value increases, you gain equity. When the value falls, you will lose equity.

In 2021, mortgage rates fell dramatically, and home prices began to skyrocket. This resulted in record amounts of equity locked up in homes.

While there are several ways to tap into equity, the two most common ways are with a second mortgage in the form of a home equity loan or a HELOC.

What is a stand-alone second mortgage?

The term “stand-alone” simply means that the second mortgage is not taken out at the same time as the first—or original—mortgage.

Home equity loans and HELOCs are both stand-alone, second mortgages.

How does a second mortgage loan work?

The process for obtaining a second mortgage is similar to that of a first mortgage in that you have to connect with a lender, apply for the loan and provide income and employment documentation.

You also will most likely need to get an appraisal to confirm the current value of your home.

The amount of equity required varies from lender to lender, but most lenders require that you have at least 20% equity in your home and will allow you to borrow up to 85% of your home’s value.

To calculate the amount of equity you could take out at 85%, multiply the value of your home by 0.85 and subtract your remaining mortgage debt.

For example, if you have a $350,000 home with a $250,000 balance remaining, you may be able to borrow as much as $47,500 with a second mortgage.

Home equity loan vs. HELOC

Home equity loans generally have fixed rates, so they are considered a fixed-rate second mortgage.

With a home equity loan, lenders provide borrowers with a lump sum of cash that is repaid over a set period of time.

HELOCs, on the other hand, are often compared to credit cards. With home equity lines of credit, you can spend the money as you need it, and the interest rates adjust over time.

You can use the funds from either of these second mortgages however you’d like; there are no restrictions. 

Common uses for second mortgages include debt consolidation, making home improvements or investing in another property.

Do banks still offer second mortgages?

During periods of economic uncertainty, banks often suspend the origination of second mortgages or tighten their requirements.

Since the housing crash over a decade ago, it often still can be difficult to find a bank that offers second mortgages or to find one where you are able to meet the qualifications.

Fortunately, we are able to fulfill this need at Compass Mortgage. 

You don’t need to get a second mortgage where you got your original mortgage, so even if you didn’t obtain your original mortgage from us, we can help you with either type of home equity loan.

Are rates for a second mortgage higher?

Rates for second mortgages may be higher than an original mortgage, because if the borrower falls into foreclosure, the second mortgage is paid after the first mortgage.

To balance the risks, a mortgage lender will often require slightly higher rates.

However, rates for home equity loans are often lower than rates for other types of credit, such as personal loans and credit cards.

Home equity loans also are a more secure option than HELOCs, because HELOCs have adjustable rates that may increase over the life of the loan while home equity loans have a stable, fixed rate.

Home equity loans also often have longer repayment terms than HELOCs.

What is the difference between a second mortgage and an equity loan?

Both home equity loans and HELOCs are second mortgages, and both are equity loans because they’re secured by a lien on your property.

Borrowers also tap into home equity with a cash-out refinance, where you take out a new loan that’s larger than the original, with the difference paid to the borrower in cash.

However, a cash-out refinance is not a second mortgage or simply an equity loan; it’s just another way to tap into home equity.

Apply for a fixed-rate second mortgage today with Compass Mortgage

Home equity loans provide numerous opportunities for borrowers, including boosting the value of their homes by making improvements, paying down high-interest debts that are holding them back or investing in another property.

To find the right second mortgage solution for your unique situation, you’ll need a supportive, experienced lender to walk you through the process and advocate for your needs.

Apply for a home equity loan today with the Compass Mortgage team. We promise a simple, personalized, respectful lending process where you’re treated like family.

We look forward to hearing from you and learning about your unique borrowing needs.

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