A second mortgage has a higher interest rate than a primary, or first, mortgage. Secondary loans are also referred to as junior, subordinate or piggyback mortgages. They tend to be more expensive for borrowers and difficult to get because of the risk involved. Should you default on a second mortgage, chances are the second lender will receive partial repayment, or in the event of foreclosure, no repayment at all. Second loans have less priority for payoff than primary-mortgages, thus, they have higher average interest rates. Interest rates depend on borrower credit, location lender, loan type and loan size.
Second Mortgage Interest Rates Rise With Indebtedness
You can get a second mortgage upon purchasing a home, or afterward, via a refinance. You tap into home equity when obtaining a second mortgage, and increase your home's combined loan-to-value, or CLTV. A CLTV ratio – expressed as a percentage – reflects total home-loan indebtedness to home value. For example, if you have a first mortgage for 80 percent of your home's value and a second mortgage for 10 percent of the home's value, the CLTV is 90 percent. Financing a larger portion of your home's value leads to higher interest rates, as the risk of default and foreclosure increases.
Home Equity Line of Credit
Lenders offer various forms of secondary financing. Home equity lines of credit, or HELOCs, are one type. HELOCs work like revolving credit accounts. Each month, you can pay the interest on amounts you have drawn from the line of credit, or pay part or all of the balance. You free up the credit line for future use when you pay down the balance.
HELOC rates fluctuate daily. A HELOC is considered a type of adjustable-rate mortgage, or ARM. The typical interest rate for a $50,000 HELOC is in the region of 5.25 to 5.75 percent, at the time of publication.
Stand-Alone Second Mortgage Rates
Borrowers can get a second mortgage for a fixed amount. This is known as a stand-alone second mortgage. You can use the funds from a stand-alone second mortgage for a variety of purposes, such as tuition, non-mortgage debt repayment and home improvements. The rate may be fixed or adjustable depending on the loan type.
A home equity loan is a type of stand-alone second mortgage. As with a HELOC, you can draw from a home equity loan, prepay it and replenish the credit line. However, interest rates for an equity loan are fixed. Also, average rates tend to be higher for home equity loans than HELOCs, perhaps three-quarters to one percent higher depending on your credit score and the amount you wish to borrow.
A closed-end second mortgage is another type of stand-alone second mortgage. It is more restrictive than a HELOC or a home equity loan because the interest rate is fixed and you can't replenish the credit or continue to draw from it if you decide to pay down the balance. The average interest rate on this type of loan is usually higher than HELOC and home equity loan rates. That rate can be higher than 10 percent, according to TheTruthAboutMortgage.com.
- MotgageLoan.com: Second Mortgage
- Realtor.com: These Factors Affect Your Second Mortgage Rates
- Bankrate: Home Equity Loan Rates
- Truth About Mortgage: Second Mortgages Explained
- NASDAQ.com. "JPMorgan Chase Stops Accepting HELOC Applications Due to Coronavirus Uncertainty." Accessed May 9, 2020.
- Wells Fargo. "Covid-19 Update: Answers to Frequently Asked Mortgage and Home Equity Questions." Accessed May 9, 2020.
- United States Congress. "Summary: H.R.1 — 115th Congress (2017-2018)." Accessed May 9, 2020.
- Internal Revenue Service. "Interest on Home Equity Loans Often Still Deductible Under New Law." Accessed May 9, 2020.
- Federal Trade Commission. "Home Equity Loans and Credit Lines: The Three-Day Cancellation Rule." Accessed May 9, 2020.
- Federal Trade Commission. "Home Equity Loans and Credit Lines: If You Decide to Cancel." Accessed May 9, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.