Who this is for
- Homeowners who want to keep a low rate on their first mortgage.
- Owners with at least 15% to 20% equity left after the new loan closes.
- Borrowers with a clear need, like a renovation, a debt payoff, or tuition.
How it works, step by step
- Work out your combined loan-to-value, your first mortgage plus the new loan, divided by your home's value, since most lenders cap this at 80% to 90%.
- Pick a fixed home equity loan for a known amount, or a HELOC for spending that changes over time.
- HELOCs usually have a 10-year draw period, when you can borrow, then a 20-year repayment period, and payments jump when the draw ends.
- Credit unions and banks often beat online lenders on second mortgages, so check them first.
Pros
- You keep your existing low rate on your first mortgage.
- Lower closing costs than a cash-out refinance in most cases.
- Interest may be tax-deductible when the money improves the home.
Cons
- Rates run higher here than on first mortgages.
- Variable HELOC rates move with the prime rate, a benchmark rate banks use to set pricing.
- Your home backs the loan, so it is at risk if you cannot pay.