Second Mortgages Explained: The 80/20, Piggyback, and More

When you hear the phrase “second mortgage,” a negative connotation may come to mind. You could be thinking, “Why would I need a second mortgage? I’m not in financial distress!”

You might even ask yourself if it’s possible to have two mortgage loans on one house at the same time.

Jump to second mortgage topics:

– Second Mortgages, HELOCs, Home Equity Loans
– The Piggyback Loan
– Standalone Second Mortgage
– How Do You Take Out a Second Mortgage on Your Home?
– Second Mortgage Rates Are Typically Higher
– Advantages of Second Mortgages
– Disadvantages of Second Mortgages
– Reasons to Take Out a Second Mortgage

What Is a Second Mortgage?

• It’s a home loan that is subordinate
• To an existing mortgage you may have
• Either used to extend financing for a home purchase
• Or to tap equity after you obtain your primary financing

Well, times have changed, and gone are the days when homeowners come up with large down payments when purchasing real estate.

While 20% down on a home purchase may have been the norm for your parents, zero down (or close to it) seems to be the standard today.

Prior to the mortgage crisis in the late 2010s, it was quite common for borrowers to hold two mortgages, typically in the form of a traditional first mortgage and a home equity line or loan as part of a combo loan.

The driving force was loose mortgage underwriting standards, which allowed prospective home buyers to purchase property with no down payment whatsoever.

High home prices also made it a necessity in many cases because people didn’t have the amount of money typically necessary for down payment.

Today, we’re not far off. Home buyers can get FHA loans with just 3.5% down, or a loan backed by Fannie Mae or Freddie Mac with just 3% down.

While both those options provide financing in a single home loan, they require you to pay mortgage insurance. And the loan amount can’t exceed the conforming limit.

So for some folks, a first and second mortgage may be necessary to get the job done, assuming loan limits are exhausted. Or two mortgages might just price out better than one.

In short, it can be difficult and/or more expensive to get a single mortgage with very little down, so homeowners will opt for two loans instead to gain loan approval. Let’s take a look at how that works.

Second Mortgages, HELOCs, Home Equity Loans

• While all these loan types get grouped together
• And are often used interchangeably by banks and lenders
• There are some very important distinctions
• Which we’ll discuss below

Put simply, a second mortgage is any home loan that is subordinated behind (comes after) a first mortgage. So if you already have a mortgage and add on another one, it’s a second mortgage. Pretty simple, right?

This secondary loan could be a HELOC or a home equity loan.

A HELOC is a line of credit. In other words, you get a home loan with a certain fixed line of credit, or draw amount, which you can use kind of like a credit card, except it’s secured by your home.

HELOCs are tied to the variable prime rate, and thus are adjustable-rate mortgages.

After the draw period ends, the amount drawn upon must be paid back during what’s called the repayment period.

Are second mortgages and home equity loans the same?

• While second mortgages are often home equity loans/lines
• A home equity loan/line can also be a first mortgage
• Taken out on a free and clear property
• Or simply used as a first mortgage by choice

When it comes down to it, most second mortgages are home equity loans. And vice versa.

So if you hear someone talking about one or the other, they could be talking about the same exact thing.

This is further complicated by the fact that most home equity loans are HELOCs. Confused yet?

You should be, considering the ambiguity of it all…let’s break it down once and for all.

While a home equity loan can be referred to as both a HELOC or a closed-end second mortgage, technically it should be the latter.

A home equity loan is a “closed-end second mortgage” that operates similarly to a first mortgage in that it’s a fixed loan amount taken out all at once, not a line of credit.

This is a big distinction because it means you pay interest on the full amount borrowed immediately. And you get all the proceeds once the loan funds to use at your disposal.

You could argue that a HELOC becomes closed-end once the draw period ends, as you can no longer borrow from it (and you have to start paying it back).

And while a HELOC is often used as a second mortgage, it can also be a stand-alone first mortgage, taken out by the homeowner when their home is free and clear, or it can be used to refinance an existing first lien.

Types of Second Mortgages

The Piggyback Loan

• A second mortgage that sits behind a first mortgage
• Taken out at the same time (single closing process)
• Extends financing and reduces down payment requirement
• A common example is an 80/10/10 or 80/20

As mentioned, some homeowners carry both a first and second mortgage, often closed concurrently during a home purchase transaction.

In these cases, the 2nd mortgage is referred to as a “piggyback loan” because it is taken out at the same time and sits behind the first mortgage.

Piggyback mortgage loans are used to extend financing, allowing borrowers to put down less on a home, or break up their loan balance into two separate amounts to produce a more favorable blended rate.

Two common formulas for a piggyback loan are an 80/10/10 loan or an 80/20 loan, the latter especially helpful if you have little in your bank account.

An “80/10/10 mortgage” translates to an 80% loan-to-value ratio (LTV) on the first mortgage, 10% LTV on the second mortgage, and a 10% down payment.

In essence, you’re putting down just 10%, but keeping your first mortgage at the important 80% LTV or less threshold to avoid mortgage insurance.

You may also get a more competitive interest rate if your first mortgage is at 80% LTV or lower.

For example, if the purchase price were $100,000, you’d get a first mortgage for $80,000, a second mortgage for $10,000, and bring $10,000 to the table in down payment money.

An “80/20 mortgage” is an 80% 1st mortgage, a 20% 2nd mortgage, and zero down payment.  Uh oh. These are less common today than they were in the early 2000s because lenders have become much more risk-averse to these types of loans.

Using the same example from above, you’d have an $80,000 first mortgage and a $20,000 second mortgage with no down payment whatsoever.

This was a simple, yet risky way to get a mortgage with no skin in the game a decade or so ago.

Standalone Second Mortgage

• Opened after a first mortgage (at a later date)
• Used to access your home equity instead of a cash out refinance
• Once you’ve owned your home for some period of time
• Helpful if you don’t want to disrupt your existing home loan but need cash

Second mortgages can also be opened after a first mortgage transaction is closed, as a source for additional funds. These are known as “standalone second mortgages” because they are taken out separately, without disrupting the first mortgage.

Let’s say you bought that same $100,000 home in our first example, but came in with a 20% down payment. Over time, you would gain equity as the mortgage was paid down.

After say 10 years, you’d have quite the equity cushion, assuming home prices also appreciated. Let’s pretend the home is now worth $125,000, and your remaining loan balance on your current mortgage is $75,000.

You’ve got $50,000 in equity to play with. You can either refinance your first mortgage to access that money, or alternatively open a standalone second mortgage to tap into it.

If it’s the latter option, homeowners can either elect to take a lump sum of cash in the form of a home equity loan, or opt for a HELOC, which allows them to draw specific amounts of money when needed using an associated credit card.

Keep in mind that you need equity in your home to execute this type of transaction.

How Do You Take Out a Second Mortgage on Your Home?

• You can take one out at the same time you take out a first mortgage
• Or later after you close your first mortgage
• Many homeowners open HELOCs after the fact
• So they have access to cash if and when needed

It’s pretty common for certain banks to specialize in second mortgages, but often you’ll be getting your first mortgage elsewhere.

In the case of the piggyback second, you would likely have the first mortgage lender point you in the direction of a second mortgage lender.

And by that, I mean they’d likely have a lending partner they work with that only offers second mortgages.

They would probably facilitate the transaction to ensure everything ran smoothly between the two lenders, handling all the paperwork so you wouldn’t have to do twice the amount of work, or even interact with the loan officer or loan originator at the other bank.

The same goes with mortgage brokers – they’re typically able to line up financing for a first and second mortgage with two different lenders concurrently.

You would still need to be underwritten by the second lender, as you would the first, and gain approval and close on the loan at the same time the first mortgage closes. You may even have to pay an appraisal fee to that lender as well.

If you already have a mortgage and simply want a second one, you’d shop for the mortgage as you would any other mortgage, and then you would apply in a similar fashion.

However, the process should be a lot easier and faster if it’s a standalone second such as a home equity loan or HELOC.

But you can expect the same basic underwriting criteria, such as income, asset, and employment verification, along with a credit pull.

The upside is that the closing costs should be a lot lower on the second mortgage, even if the rate is higher. That brings us to another important topic.

Second Mortgage Rates Are Typically Higher

• One major downside to second mortgages is that the interest rates can be quite high
• Usually double that of first mortgage rates and sometimes in the double-digits
• Often feature variable interest rates that are tied to the prime rate, which can go up/down whenever the Fed takes action

Curious if second mortgage rates are higher, lower, or the same as rates on first mortgages?

Well, monthly payments on second mortgages are typically pretty low relative to first mortgages, but only because the loan amount is generally much smaller.

For example, if you have a first mortgage of $400,000 and a second mortgage of $50,000, the monthly mortgage payment will be a lot lower on the second, even if the mortgage rate is high (and they can be). That’s the saving grace.

But interest rates on second mortgages will generally be higher than firsts, and can be quite steep, we’re talking 12% in some cases depending on property type, equity in your home, and type of second mortgage, so be sure to do the math to ensure it’s the right choice before moving forward.

The rates are higher for several reasons, one being that they’re subordinate to the first mortgage. That means they’re riskier to the lender because they get paid out second in the case of a foreclosure.

Another reason they tend to be higher is because the loan amounts are small, as noted, so less interest is earned by the bank. And the LTVs are often quite high, meaning there isn’t much of an equity cushion if home prices take a turn for the worse.

However, there are affordable options as well if you have good credit and a decent amount of equity in your property. And they can be a lot cheaper than personal loans.

As mentioned, several loan types are available. Second mortgages are offered with both adjustable rates and fixed-rate options, with home equity loans typically fixed and HELOCs variable rate loans tied to the prime rate. They may also feature balloon payments.

If you go with a fixed option, expect the rate to be higher at the outset because you’re paying for the relative safety and stability of a rate that won’t adjust.

Lately, I’ve seen second mortgage rates advertised in the high 4% range, which is pretty attractive, though the LTV is typically capped at 70% or nowhere close to 100%. Rates may range from 5-7% or higher for other, more typical scenarios.

If you go with a variable rate, such as a home equity line of credit, you might be able to get a rate below prime (currently 4.50%).

For example, current mortgage rates advertised by credit unions are around 3-4%, which is generally a teaser rate for the first six months or year. After that time is up you might expect a rate of 4.50% or higher.

While the rates might be similar to fixed seconds, they can come in handy if you just need temporary financing and want the lowest possible rate, or if you just want to borrow a small amount and pay it back fairly quickly.

Definitely take the time to compare rates, as you would on a first mortgage.

HELOCs work similar to a credit card in that you can borrow over and over again up to your credit limit. Also note that HELOCs come with an interest-only option during the initial draw period, as do some home equity loans early on.

In any case, just like first mortgages, you should have several options to choose from to find the right fit for your particular situation.

It might be in your best interest (the puns just won’t stop) to put more money down or explore other alternatives such as a larger first mortgage amount if the interest rate is sky-high on the second mortgage.

Tip: You might be able to get a second mortgage with bad credit but the interest rate will likely be high and the LTV could be fairly limited as well.

Advantages of Second Mortgages

• Can reduce down payment requirement
• And the need to take out mortgage insurance
• May produce a lower overall interest rate
• Or keep loan amount below conforming limit

Second mortgages that are closed concurrently with the first mortgage during a purchase transaction are also referred to as “purchase money second mortgages.”

As mentioned earlier, these second mortgages allow homeowners to come in with a smaller down payment, or no down payment at all.

During a purchase transaction, the homeowner can break up the total loan amount into two separate loans called a combo loan. The risk is split between the two loans, allowing higher combined loan-to-values and lower blended interest rates.

Second mortgages in the form of piggyback loans also allow homeowners to avoid paying PMI, or private mortgage insurance.

The savings can be quite substantial depending on how the loan breaks down, often saving the homeowner hundreds of dollars a month. If the first loan is kept at or below 80% loan-to-value, PMI needn’t be paid.

Additionally, breaking up your total loan amount between a 1st and 2nd mortgage may allow you to keep your first mortgage under the conforming loan limit, which should help you obtain a lower interest rate if you’re in jumbo loan territory.

Second mortgages can also be opened after the purchase transaction is complete, as a home equity loan or home equity line of credit.

This additional allowance of funds can provide a homeowner with much needed cash to improve the quality of their home or pay off high-interest loans, while avoiding a refinance of the existing first mortgage.

This can make sense if your first mortgage rate is fixed and super low, and you want to hang onto it. I expect this to be a common scenario thanks to those record low mortgage rates.

Disadvantages of Second Mortgages

• Reduces your home equity
• May come with high interest rates
• And limit your ability to borrow more
• Equates to more debt and additional monthly payments

Once you’ve got a second mortgage, it will be increasingly difficult to get any additional financing, such as a third mortgage.

While it’s probably not common that a homeowner should require a third mortgage, emergencies do happen, and you may mind yourself trapped if you need more funds for any other reason.

Interest rates on second mortgages are typically quite high compared to first mortgages, and it’s quite common to receive an interest rate in the double-digits on a 2nd mortgage.

You could get a better deal with just one mortgage, or possibly even by paying mortgage insurance.

Many second mortgages are home equity lines of credit, which are tied to the prime rate.

Whenever the prime rate is adjusted, the interest rate on your home equity line will change accordingly, effectively making it an adjustable-rate mortgage.

When the Fed was raising the prime rate month after month in years past, many homeowners faced substantially higher monthly payments on their second mortgages.

Some home equity lines come with additional fees, such as an early closure fee, as well as minimum draw amounts that may exceed your personal needs. Make sure you read all the fine print to avoid any unwanted surprises.

Last but not least, second mortgages mean more debt, a higher mortgage payment, more interest due, and can potentially extend the amount of time it takes to pay off your original mortgage.

It’s also possible to get in over your head and lose your home if you can’t keep up with both monthly payments. After all, you have to repay the loan at some point.

All that said, while there are a number of pros and cons to opening a second mortgage vs. just sticking with a single home loan.

They shouldn’t be looked upon as negative financing instruments, rather just another option to consider when seeking home loan financing.

Reasons to Take Out a Second Mortgage

• To extend financing (get zero down or low-down financing)
• To avoid mortgage insurance by breaking the loan up into two
• To keep the first mortgage at/below the conforming limit for a lower interest rate
• To fund home improvements, pay for college tuition, pay off an auto loan
• For debt consolidation (pay off high-interest credit cards)
• To have an emergency source of cash at the ready
• To fund an additional home purchase (down payment)

One final note: Many mortgage lenders have reduced the availability of second mortgage programs in recent years as a result of the prior financial crisis, so you may find it much more difficult to obtain one these days.

But second mortgages are still around, and can be found at a variety of banks, lenders, and credit unions nationwide.  The only difference now is that the LTV is often restricted to say 85-90%, versus 100% during the housing boom.

At the same time, there are still crazy loan programs that allow folks to get a second mortgage with no equity in the home, like 125% second mortgages being offered by CashCall.  So there’s plenty out there if you’re willing to pay a premium for it.