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Why you Might Need a Second Mortgage
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Why you Might Need a Second Mortgage

Second mortgage loans are a type of loan that makes use of the equity of a home as collateral against the loan. These loans are known as ‘second mortgage’ loans because they follow the initial mortgage that was taken out to purchase the home. A mortgage is, essentially, a loan and a second mortgage is a second loan taken out against that home.

Why get a Second Mortgage?

You might want a second mortgage for a variety of reasons, some of which could be to consolidate other debts into one payment (credit cards, for example), or to finance home improvements, pay for home repairs, pay for a holiday or a car…

Second mortgages can be used in much the same way as any other type of loan, but missing payments could mean losing your home.

What Types of Second Mortgages Are There?

Borrowers looking to take out a second mortgage normally choose either an equity loan or a home equity line of credit. Let’s take a look at both of these options.

Equity Loan

A home equity loan is received in a one-time lump sum. The loan is secured by the equity on your home and it is repaid at a fixed interest rate (meaning payment amounts will not change from month to month). The rate received with an equity loan will depend on your credit but it is possible to get this kind of loan with bad credit.

Home Equity Line of Credit (Known as HELOC)

This type of loan is similar to a credit card except they are, like the previous loan, secured against the equity of your home. With this kind of loan, you can borrow against the home’s equity, repay the loan, and then borrow again. The interest rates on a HELOC loan are variable.

The draw period on a HELOC is usually up to 10 years. During this period, a borrower might only be required to pay the interest but this depends on the terms of the financing. When the draw period is over, there comes a repayment phase – this can be up to 20 years.

During the repayment phase, monthly payments can rise by a significant amount. This type of loan is, as you can probably surmise, not for everyone but it is an option if you need it.

Some Common use Cases for a Second Mortgage Loan

You might opt for a second mortgage loan for:

  • Home repairs or improvements
  • College tuition expenses
  • Consolidation of high-interest debt

Some borrowers have been known to use a second mortgage loan to buy property, as an investment. This is risky however because a downturn in the market can lower the value of both the borrower’s home and the investment property.

Should you Get a Second Mortgage?

Before deciding to secure a second mortgage loan, you should be careful to consider the risks associated with it to make sure this type of loan will work for you. By far the best reason to take out a second mortgage is to use it for home improvements and increase the value of your home.

Additionally, if you use the loan to improve the home you used to secure the loan, the interest that you pay could be tax-deductible.

Where to find second mortgage rates


It is a good idea to shop around, don’t settle on the first lender that you come across. A bank or credit union could be good places to start, just be sure to get quotes from several mortgage providers – this includes online loan providers – and look at them in detail before you decide.

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