Understanding second mortgage rates: What you need to know

According to information services provider CoreLogic, the average homeowner had $305,000 in home equity at the start of the year, $28,000 more than the year before. If you want to tap into your home’s equity to consolidate debt or pay for big expenses, you could get a second mortgage — with a second mortgage rate.

Second mortgages — like home equity loans and home equity lines of credit — sometimes come with higher rates than primary mortgages. Before refinancing your home or purchasing a second one, here's what you need to know about second mortgages, their impact on your finances, and how to qualify for the best rates.

What is a second mortgage?

A second mortgage is a loan taken out while you’re still paying your first mortgage. It’s secured by your home equity, which is the difference between your home’s value and what you owe. Most lenders will let you borrow up to 80% of your home’s appraised value, as long as you still have at least 20% equity in the home.

For example, say you owe $180,000 on your existing mortgage, and your home is currently worth $350,000. You can typically borrow up to 80% of your home’s appraised value, minus the amount you still owe. In this case, 80% would be $280,000; subtract the amount you still owe, and you could borrow up to $100,000 with a second mortgage. 

The main types of second mortgages are:

• Home equity loan: This is a lump-sum loan with a fixed rate and set repayment term. Lenders may limit how much you can borrow. These loans may also come with additional fees.
• Home equity line of credit (HELOC): HELOCs usually consist of a draw period and a repayment period. During the draw period — typically up to 10 years — you can borrow against your equity up to your limit. When the draw period ends, you'll need to start repayment on the amount borrowed plus interest. HELOCs usually come with an adjustable interest rate.

These types of second mortgages are convenient when you need the funds for debt consolidation, home improvements, or major repairs. A home equity loan may work better if you know how much you want to borrow upfront; a HELOC might be preferable if you want flexibility to access funds as you need them.

Another type of second mortgage allows you to purchase a second home while you still have a mortgage on another. The types of properties that qualify as a second home include:

• Properties where you live for part of the year (e.g., vacation home)
• Rental properties where you live at least 14 days of the tax year or 10% of the number of days you rent it out, whichever is greater
• Any other property that isn’t your main home or primary residence

How do second mortgage rates work?

Like any type of home loan — such as FHA loans or first-time homebuyer loans — second mortgages come with their own interest rates. These are sometimes called second mortgage rates and may be either fixed or variable.

Home equity loan rates are usually fixed, meaning they don’t change over the course of the loan. They’re sometimes referred to as fixed-rate second mortgages.

Home equity lines of credit typically have an adjustable rate. HELOC rates can fluctuate with the market, meaning the interest you pay could change periodically.

Second mortgage rates are generally higher than primary mortgage rates. This is because, in the event of foreclosure, the second mortgage gets repaid after your primary mortgage. If there isn’t enough equity to cover both loans, your lender might not receive the full amount owed. 

Types of second mortgages

Before choosing a second mortgage, know your options. These are the main types of second mortgages, or “piggyback” loans:

Factors affecting second mortgage rates 

Just like with refinance mortgage rates or primary mortgage rates, several internal and external factors can affect second mortgage rates, including:

• Personal credit score: Most credit scores range from 300 to 850. A score above 669 is considered “good” credit. Generally, lenders offer the best rates to borrowers with higher scores.
• Debt-to-income ratio (DTI): Your DTI is your monthly debt payments divided by your pre-tax monthly income. The lower your DTI, the less risky you are to a lender and the better the interest rate you could get. The maximum DTI for a primary mortgage is generally 43%. Second mortgages may come with different limits, depending on the lender.
• Remaining mortgage balance: Lenders may consider this when determining your rate. Generally, the less you still owe, the better your rate will be.
• Effective federal funds rate: The Federal Reserve sets this rate, which is the rate banks and financial institutions charge each other for loans. It influences interest rates on longer-term loans.
• Loan-to-value ratio (LTV): This is your mortgage amount assessed against the value of your property. If you have a lower LTV, you may get a better rate.
• Current mortgage rates: Keep an eye on 30-year fixed-rate mortgage rate trends. HELOCs and HELs generally have higher rates than primary mortgages, but you can use the current mortgage rates to get an idea of your potential rate.
• Second mortgage amount: Borrowing a larger amount could increase your interest rate. 

How to qualify for a second mortgage

Whether you’re getting a second property while paying off your primary mortgage or you’re taking out a second loan on your current mortgage, the requirements are similar. While every lender has its own requirements, here’s what you’ll typically need to qualify:

1. Minimum credit score: You’ll likely need a credit score of 620 or better, but it can vary by lender. Check with your loan servicer to see what its credit requirements are. Also, get a copy of your credit reports and review them for errors. If you find any, dispute them.
2. Ability to repay: Review your income, expenses, and debts alongside the cost of the second mortgage. Add up any fees — including interest rates — to make sure you can reliably repay what you borrow.
3. Pre-approval or prequalification. Just like with a primary mortgage, you may be able to get pre-approved or prequalified for a second mortgage. This can give you a better idea of your terms and rates.
4. Home equity: For HELOCs and HELs, many lenders require you to have at least 20% equity in your home. You may also need a certain amount of cash reserves to qualify.
5. Financial documents: You’ll generally need to provide documentation to get a second mortgage. This may include bank statements, tax returns, profit/loss statements, or recent pay stubs. It may also include documents related to your assets and liabilities.

Pros and cons of a second mortgage 

Tips for securing the best second mortgage rate 

Whether you’re buying a new house this year, or you’re getting a second mortgage, you’ll want to get the best mortgage rate possible. Here are some ways to do that:

• Improve your credit score: Having a higher credit score can improve your chances of getting a second mortgage and get you a better rate. Making timely payments will help boost your credit score.
• Reduce your debt: The less money you owe, the better your rate could be. Having less debt can also make it easier to keep up with the new loan’s payments.
• Review your options: Compare lenders and their second home mortgage rates carefully to get the most affordable one. Decide whether a HELOC or HEL is right for you — consider whether you need a lump sum or access to funds over time.
• Boost your income and cash reserves: The higher your income, especially compared to your debt load, the better your chances of getting a low-interest-rate loan.
• Watch for rate changes: Home equity loan rates and HELOC rates are usually higher than primary mortgage rates, but it helps to know current mortgage rates.

Second mortgage rates FAQ 

Can I get a second mortgage with bad credit?

Credit score requirements vary by lender. Some lenders may require a 620 credit score or higher. Others may still offer a second mortgage but reduce how much you can borrow.

How does a second mortgage affect my primary mortgage?

A second mortgage is secured by your home equity, meaning you risk losing your property if you default on your loan. Alternatively, the lender may try to sue you for repayment.

If you choose to sell your home while you have a second mortgage, the proceeds will go toward your remaining balance — first on your primary mortgage, then on your second one.

Is interest on a second mortgage tax deductible?

If you take out a home equity loan to purchase, build, or improve your home, your interest payments may be tax-deductible up to a certain amount. The IRS lets you deduct interest payments on up to $375,000 of qualified mortgage debt ($750,000 if married filing jointly).

Exclusions and limitations apply, so check the IRS’s official website for more details.