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If you’ve locked in a low mortgage rate, you probably don’t want to refinance at a higher rate despite any financial benefits the move might provide. A second mortgage, however, could unlock access to your home’s equity without disturbing the favorable first loan. Let’s look at how second mortgages work and when they work best.

A second mortgage is a separate loan taken out on a property that has a primary mortgage. Unlike a refinance, this doesn’t replace your first mortgage; both loans exist simultaneously, and each has its own monthly payment.

For collateral, a second mortgage is secured by your home’s equity: the difference between its appraised value and what you still owe.

In the event of a default, the first mortgage is paid off before the second. This creates a higher risk, which is why interest rates on second mortgages tend to be slightly higher than those on first mortgages.

Second mortgage rates, however, are often significantly lower than credit cards or personal loans. For many homeowners — especially those with fixed rates between 2% and 4% — that makes a second mortgage a cost-effective way to pull cash out of their home.

Once the funds are in hand, you can generally use them however you wish. Common uses include:

• Debt: Paying down high-interest credit card debt and personal loans with a lower-rate loan.
• Education: Covering the cost of higher education, including tuition, housing, and academic fees.
• Investments: Making a down payment on a second home or an investment property.
• Emergencies: Dealing with unexpected medical bills or similar significant expenses.

Home improvements, one of the most common uses for second-mortgage funds, come with an added benefit: tax deductions. If the money is used to improve the home that secures the loan, the interest may be tax-deductible.

In most instances, the existing mortgage balance and the second mortgage amount can’t together exceed 80% to 85% of the home’s value. In some cases, however, that can be as high as 97%. This combined loan-to-value (CLTV) ratio is the key metric mortgage professionals typically use to calculate how much you can borrow.

Here’s what it looks like. Your home is worth $700,000, and you owe $300,000 on your first mortgage. A second mortgage with an 85% CLTV limit could provide approximately $295,000 in cash.

As second mortgages tend to carry higher risk, qualifying requirements are commonly stricter than those for a first mortgage. Borrowers generally need to meet these criteria:

• Credit score: Requiring a score of 640 or above is common. Scores above 700 can often help secure a better interest rate.
• Debt-to-income (DTI) ratio: A DTI of 43% or lower — where monthly debt payments don’t exceed 43% of monthly gross income — is the industry standard. Borrowers with significant assets may get approved with higher DTIs.
• Documentation: Income verification and a home appraisal are typically required.
• Closing costs: As with a first mortgage, upfront fees generally range from 1% to 5% of the loan amount.
• Sufficient equity: You will likely need to keep at least 15% to 20% equity in your home after you take out a second mortgage.

There are two main types of second mortgages: Home Equity Lines of Credit (HELOCs) and Home Equity Loans (HELOANs).

Home Equity Line of Credit (HELOC)

This works like a credit card. You get approved for a borrowing limit for a period (typically 10 years). Then you can draw cash as needed, paying interest only on the money you receive. HELOC rates are typically variable, meaning payments can fluctuate with the market, with a cap on how high the rate can go.

HELOCs work best when your borrowing needs are ongoing, such as tuition, or uncertain, like a renovation project where you don’t know the final cost.

Home Equity Loan (HELOAN)

Called a fixed second mortgage, a home equity loan works like a traditional installment loan. You get the full amount in a lump sum and make monthly payments over a set term (typically from 5 to 30 years). Most HELOANs have fixed interest rates, so the payments are predictable and never change.

HELOANs are ideal for one-time costs such as debt consolidation, fixed-budget renovations, and major expenses like a vehicle or wedding.

• Rate integrity: You can access your home’s equity without touching your low-rate primary mortgage.
• Affordable borrowing: Interest rates are typically much lower than credit cards, personal loans, or other unsecured debt.
• Flexible funding: Choose between a lump-sum disbursement (HELOAN) with a reliable payment structure or a flexible line of credit (HELOC), depending on your needs.
• Tax advantages: If you use the money to improve the home that secures the loan, the interest may be tax-deductible.
• Borrowing capacity: You can often access significantly more capital than you could with a personal loan.

• Foreclosure risk: Missed payments could put your property in jeopardy.
• Additional payments: You’ll be making two separate mortgage payments each month.
• Closing costs: With upfront fees of 1% to 5% of the loan amount, the initial cost will likely be in the thousands.
• Interest rates: You’ll probably secure a higher rate on your second mortgage than on your first.
• Rate fluctuation: If you choose a HELOC, your payment amounts could increase over time as market rates rise.