A second home mortgage allows you to tap into your home’s equity. Whether you’re remodeling your house, starting a business or just investing in something else, a second mortgage offers a large amount of cash to help you make your next big move. However, the eligibility requirements, terms, loan amounts and costs can vary from one lender to the next. To help you find the right deal, it’s important to research the providers with the best second mortgage rates and terms on the market and who each type would work best for.
The 5 Best Second Mortgage Lenders
- Discover: Highest loan-to-value (LTV) allowance for new homeowners with little equity
- Alliant Credit Union: Lowest interest rate and low-cost HELOC solution
- Bank of America: Best introductory offer for big purchases you can pay off in a year
- PenFed Federal Credit Union: Best for smaller credit lines from $10,000
- Citi: Best for large loans and credit lines and homeowners with lots of equity
|Provider||Loan Types||Loan Rates||Loan Amounts||HELOC Terms||HEL Terms||LTC|
|Discover||HEL||Fixed starts at 3.99%||$35,000 to $200,000||N/A||10 to 30 years||95%|
|Alliant Credit Union||HELOC||Variable starts at 4%||Up to $250,000||15 to 30 years||N/A||90%|
|Bank of America||HELOC can convert to HEL||Variable 5.400% with 3.240% introductory rate||$25,000 to Up to $1 million||10 years||N/A||N/A|
|PenFed||HELOC||3.24% fixed||$10,000 to $400,000||5 to 20 years||N/A||90%|
|Citi||HEL and HELOC||HEL fixed at 5.9% to 8.49% APR and HELOC variable at 6.59% to 8.54% APR||HELOC $10,000 to $1,000,000 and HEL $25,000 to $300,000||10 year draw period||5 to 30 years||80%|
What is a Second Mortgage?
Most people who purchase homes do so with the help of a loan, otherwise known as a mortgage. You make a down payment and the rest, plus interest, is split up into payments over 15 to 30 years. As time goes on and you make your mortgage payments, you gradually own more of your home by gaining equity. Once you have at least 20% equity, many lenders will approve you for a second mortgage, which allows you to borrow against the part of the home you own.
For example, say that you originally took out a $250,000 loan to purchase your home and pay down the principal to $200,000. If your home’s value has gone up to $300,000, you’ll have $100,000 in equity, which leaves you at about 67% LTV. You can now apply for another loan — a second mortgage — to gain access to that $100,000. The loan would be secured by a second lien on your home. As a result, you would have two mortgages and two monthly payments.
People often take out second mortgages to make home improvements, avoid private mortgage insurance, consolidate debt or invest in education. This type of mortgage can allow for large loan amounts, low interest rates and potential tax benefits. However, second mortgages do present potential drawbacks, including expensive closing costs and an increased risk of foreclosure if you can’t keep up with the payments.
Second Mortgage vs Personal Loan
If you need a lump sum of money, you can also consider a personal loan. The main difference between a personal loan and a second mortgage loan is that a personal loan is unsecured. Approval is based on your credit and financial picture, and if you default, the debt will go into collections but it’s not directly tied to any of your assets.
A second mortgage is secured by your home, so the lender can foreclose on your home if you don’t keep up with payments. However, because your home offers more security for lenders, second mortgages often come with larger loan amounts, more lenient approval requirements and lower interest rates than personal loans. The right choice will depend on your needs and circumstances.
If you have really strong credit, you may be able to qualify for a large personal loan with great terms and can avoid the closing costs and foreclosure risk that comes with a second mortgage. But if your credit is fair-to-good — or worse — and you have home equity, a second mortgage will likely offer you the most money at the lowest price.
Second Mortgage vs Personal Line of Credit
Another borrowing option to consider is a personal line of credit. Like a personal loan, it is backed by your credit and income rather than an asset. Unlike a personal loan, it is not a lump sum, but an amount of credit available to you to borrow against and pay back. It could be in the form of a credit card or a more formal credit line that you can request transfers from. The main benefit of a personal line of credit is that it is not directly tied to an asset, it often comes with low fees and you only pay interest on amounts you borrow. This could be a good fit if you have good-to-excellent credit. If your credit is less than stellar, a personal line of credit will be more difficult to get approved for than a second mortgage.
Home Equity Loan vs HELCO
If you decide that a second mortgage is the right solution for you, you can choose between accessing your equity with a home equity loan or home equity line of credit (HELOC). As explained above, a line of credit makes a specific amount of money available to you, but you aren’t charged interest until you actually withdraw it. This is a good fit if you don’t need a large amount of money all at once. With a home equity loan, a lump sum is disbursed to you and you pay it back in set payments over time, plus interest. HELOCs typically have slightly higher interest rates than home equity loans, but you also may not be paying interest on the full amount. The right fit just depends on how you plan to spend the money: all at once, or in smaller purchases over time.
The Best Second Mortgage Rates
If a second mortgage is the right solution for your situation, these providers offer some of the best second mortgage rates.
- Discover: Highest loan-to-value (LTV) allowance
When you think of Discover you may think of credit cards, but the company provides banking products, too. It has stepped up its game with a home equity loan second mortgage offering that stands out among the rest due to its high LTV allowance. In general, most lenders require borrowers to have an LTV of 80% or less, but Discover will approve borrowers with LTVs up to 95%. That means if your home is worth $400,000 and you still owe $360,000 on it, you could still get approved. The loan amounts range from $35,000 to $200,000 and they come with a fixed interest rate as low as 3.99%. Terms range from 10 to 30 years and there are no fees or closing costs. However, if you pay off your loan within the first 36 months, an early termination fee applies. This home equity loan is a great fit for those with relatively new loans or whose home value has dropped.
- Alliant Credit Union: Lowest interest rate
Alliant Credit Union is an Illinois-based credit union that offers a variety of financial products and services with very competitive terms and rates. While there are eligibility requirements to join, Alliant has added an option that allows anyone to become a member. That being the case, you can join and take advantage of great offers like a HELOC with a variable APR as low as 4%. Credit lines up to $250,000 are available with no closing costs or appraisal fees. Furthermore, you can choose between a 15-year draw period with regular interest and principal payments or a 30-year draw period for interest-only payments. To qualify, you need to have an LTV that is 90% or less.
- Bank of America: Best introductory offer
Bank of America is a well-known player in the mortgage industry that shows its seniority with this standout introductory offer. When you open a HELOC with the bank, you can get a special discounted rate for the first 12 months. For example, if you take out a $100,000 credit line, your variable interest rate could be as low as 3.240% for the first year, returning to 5.400% afterward. The banking giant also offers three discounts that can reduce your interest rate, including 0.25% off for automatic payments, up to 1.50% off from initial withdrawals and up to 0.38% off for Preferred Rewards clients. Credit line amounts are available from $25,000 up to $1 million with a 10-year draw period. Plus, you can also convert your credit line into a loan with a fixed interest rate at any time without fees.
- PenFed Federal Credit Union: Best for smaller credit lines
PenFed is a credit union that was established in 1935 and has grown to serve over 1.7 million members worldwide. Its home equity offering, a HELOC, stands out because it allows for lines starting as low as $10,000 and go as high as $400,000. Many of the other banks have minimums of at least $25,000, so this is a good option for those looking to borrow a smaller amount. The HELOC also comes with competitive fixed interest rates that start at 3.24%. You can choose from various HELOC types with draw periods ranging from five to 20 years, making this a versatile and affordable offering, plus the closing costs are covered. To apply, you will have to join the credit union, but can now do so by joining one of the supporting organizations.
- Citi: Best for large loans and credit lines
Lastly, Citibank is a leading global bank that serves over 200 million customers. The company’s dominance in the market may be why it is able to offer such broad-reaching loans and credit lines to homeowners looking for a second mortgage. You can turn to Citi for a home equity loan ranging from $25,000 to $300,000 or a HELOC ranging from $10,000 to $1 million. Terms range from five to 30 years on loans while HELOCs have a 10-year draw period. You’ll have to have a little bit more equity to qualify with Citi than with other lenders as Citi holds to the 80% LTV maximum, but you can also get access to higher amounts than many other lenders offer. Moreover, the second mortgage rates are competitive. If you’re looking to access a larger amount of equity, check out Citi for a quote.
The Final Word
A second home mortgage is a good product for those with home equity who can comfortably fit the repayments into their budget. It can open doors you wouldn’t otherwise be able to think about. Still, you’ll want to get quotes and run the numbers carefully to ensure that the loan won’t cause any financial stress. The truth of the matter is that missed payments can lead to a foreclosure. However, as long as you do your homework and find competitive second mortgage rates and terms, it can be a great financial tool.