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A second mortgage offers homeowners the financial opportunity to tackle a costly project. It’s essential to shop and compare lenders to get the second mortgage that complements your financial goals.
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A second mortgage allows you to tap into the equity you’ve built in your home so you can start a business, remodel your home or pursue another large project. Loan terms vary by lender, so you should shop around for the best interest rates, lowest fees and most convenient repayment periods. After all, a second mortgage gets you cash upfront, but you still need to pay it back, so you’ll want to make sure the terms of your second loan are solid — and can be easily meet.
To narrow down your choices of home mortgages, you’ll need to understand second home mortgage rates, the types of home equity loans available and the differences between lenders.
The best second mortgage rates of 2020
- Discover — Best for new homeowners with little equity
- Alliant Credit Union — Best for lowest interest rate
- Bank of America — Best for intro offer
- PenFed Credit Union — Best for small credit lines
- Citi — Best for large loans and credit lines
| 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 | Varies by state | $25,000 to $1 million | 10 years | N/A | N/A |
| PenFed | HELOC | 3.75% – 4.75% variable | $10,000 to $400,000 | 5 to 20 years | N/A | 90% |
| Citi | HEL and HELOC | HEL fixed at 6.59% to 6.62% APR and HELOC variable at 3.99% 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?
When people buy a property, they take a mortgage out from a lending or financial institution with the home acting as collateral. Each month, as the homeowner repays the loan, their equity, or ownership stake in the home, grows.
When a homeowner builds up enough equity, they can borrow against it — this is called a second mortgage. In a second mortgage or home equity loan, the homeowner receives a large lump sum, which must be repaid over time, either with a fixed or variable interest rate. Another type of home equity loan is a HELOC, or home equity line of credit, which is a line of credit you can draw from for a set period of time and repay when the draw period is over.
Second mortgage vs. personal loan
While a second mortgage involves borrowing against an asset (your home), a personal loan is approved based on your creditworthiness and ability to repay. If you default on a second mortgage, your home can be seized to satisfy the loan, but defaulting on a personal loan results in your debt going into collections.
A second mortgage involves less risk for the lender, so homeowners can often get approved for a larger loan amount with lower interest rates than a personal loan. If you have strong credit and want to avoid using your home as collateral, a personal loan might be an option.
Second mortgage vs. personal line of credit
Rather than your home acting as collateral, a personal line of credit is approved based on your credit and ability to repay. A personal credit line offers credit you can borrow against and then pay back with interest. Credit cards work similarly, but often offer rewards programs in conjunction to a revolving line of credit. Credit cards also typically have higher interest rates than personal lines of credit do, and credit cards can’t offer as high of credit limits.
A personal line of credit offers low fees and higher credit limits, and interest is only applied to the amount you borrow. This financial option might be a smart choice if you have good or excellent credit.
Home equity loan vs. HELOC
A second mortgage, sometimes called a 2nd mortgage, can refer to either a home equity loan or a HELOC. A home equity loan and a home equity line of credit (HELOC) both use a homeowner’s property as collateral and borrow against available equity. However, a home equity loan provides you with a fixed interest rate and a lump sum. A HELOC, on the other hand, offers a line of credit with an adjustable interest rate from which you can draw funds, up to the maximum loan amount.
With most HELOCs there is a draw period during which you can borrow as much or as little as you need up to the limit of your credit line. Once you repay what you’ve borrowed, your line of credit replenishes to the full amount. When the draw period is over, you’ll have to pay back what you owe and any interest that has accrued.
The 5 best second mortgages of 2020
Discover — Best for new homeowners with little equity
If you don’t have a ton of equity in your home, you’re in luck. Discover offers loan amounts from $35,000 to $200,000 with fixed-term interest rates as low as 3.99%. Loan terms can be from 10 years to 30 years. And, homeowners don’t have to worry about closing costs, appraisal fees, application fees or loan origination fees. In fact, you don’t have to bring any cash at all for closing.
The downside is that if you pay your loan balance off in full within three years after your loan closes, you are on the hook to reimburse Discover for a portion of the closing costs originally paid on your behalf, up to $500.
Alliant Credit Union — Best for lowest interest rate
Alliant Credit Union delivers great value for homeowners who don’t want to be stuck paying high interest rates. Although this credit union is based in Illinois, it recently opened eligibility to allow anyone to become a member. Alliant offers HELOCs with a low variable interest rate of 4%. You can get approved for credit lines up to $250,000 with no appraisal fees or closing costs.
Homeowners can choose between two HELOC structures: a 15-year draw period paired with principal payments and regular interest or a 30-year draw period with payments on the interest only.
Bank of America — Best for intro offer
Bank of America offers a great discounted rate for homeowners who open a HELOC, especially if they are already Bank of America customers. For initial loan withdrawals, borrowers enjoy up to 1.50% off their interest rate. Your loan amount range can be from $25,000 up to $1 million with a 10-year draw period and a 20-year repayment period.
The main benefits are the discounts for existing customers who can get 0.25% off their interest rate for setting up payments from their Bank of American account. Preferred Rewards members can also get an additional discount that ranges from 0.125% to 0.375%.
PenFed Credit Union — Best for small credit lines
PenFed Credit Union offers home equity lines of credit for loans between $25,000 to $500,000. Homeowners receive a 10-year draw period in addition to a 20-year repayment period. During the draw period, you’ll only need to make payments on interest. Plus, you can switch from a variable to a fixed interest rate at any time on the entire line of credit or just a portion of it.
PenFed also pays most closing costs and waives the $99 annual fee if you paid $99 in interest during the preceding year.
Citi — Best for large loans and credit lines
Citibank is one of the largest lending institutions on this list, and as such, it can offer equally large loans and credit lines. Citi offers home equity loans from $25,000 to $300,00 or HELOCs from $10,000 to $1 million. For home equity loans, the repayment period is between 5 and 30 years and HELOCs from Citi offer a 10-year draw period. Although it’s true that homeowners are required to have higher amounts of equity in their home to qualify, you can unlock much larger loans and better terms with Citi mortgage rates.
Next steps
- What Determines Your Mortgage Rate?
- How to Finance a Home Renovation
- How to Find the Right Mortgage Lender
Michelle Wilson
Contributing Writer
Michelle Wilson is a San Diego-based writer specializing in unraveling the mysteries of personal finance and technology.
