Can I get a home equity loan if I already have a mortgage?

We all have goals and things we want to do with our money. Maybe your goal is to upgrade your kitchen or consolidate debt, or you want to start a profitable side hustle. A home equity loan could help you turn your ideas into action. 

What is a home equity loan? And how does it work if you have a mortgage already? Let's break it down. 

Can you get a home equity loan if you still have a mortgage?

It's possible to get a home equity loan if you still have a mortgage. You can have a primary mortgage, which is the loan you used to buy the home, and a home equity loan or home equity line of credit (HELOC) at the same time. You'll make monthly payments on each loan until they're paid off. 

You can apply for a home equity loan from the same lender that issued your first mortgage, or a different lender. Home equity loans and HELOCs use your home as collateral. Collateral is a financial safety net for the lender. Just like with your mortgage, if you don’t repay your home equity loan or HELOC, you could lose your home.

The amount you can borrow with a home equity loan depends on how much home equity you have, your credit score, and other factors. Equity is the difference between what your home is worth and what you owe on your first mortgage.

Why get a home equity loan when you already have a mortgage? Home equity loans and HELOCs help fill cash flow gaps for people who want or need to:

• Consolidate debt, including credit cards or medical bills

• Remodel their homes

• Cover large expenses

• Start a business

Those are just some of the ways you could use a home equity loan to level up your life. A HELOC could also save the day in a pinch if you don't have an emergency fund to draw on. 

How does a second mortgage work?

What's the difference between a second mortgage vs. home loan? 

Second mortgages are home loans you take out on top of a primary or first mortgage. Home equity loans and HELOCs are second mortgages. 

To you, they are essentially the same. Your mortgage and your home equity loan are two separate loans that you need to repay.

To lenders, there’s an order of priority. Lenders distinguish between first and second mortgages to determine who gets paid first if you sell the home or if it ends up in foreclosure. 

When you sell your home, the money from the sale first goes to pay off the primary mortgage. Then any second mortgages are paid off. Whatever is left is what you walk away with. If your home is foreclosed on, the same order applies, only you don't get any of the profits since the bank owns the property. 

A home equity loan second mortgage has the same features as a primary mortgage:

• You'll pay interest to the lender.

• Your loan will have a repayment schedule you're expected to follow.

• If you don't pay, your lender could charge late fees and take other collection actions against you.

Is a home equity loan the same as a cash-out refinance?

No, a home equity loan and a cash-out refinance aren’t the same. When you get a home equity loan or HELOC, you don't replace your original mortgage. Instead, you have two mortgages on the home. 

A cash-out refinance replaces your primary mortgage. It’s a home loan that’s big enough to pay off your current mortgage and leave you with some additional cash. The new loan may have a different interest rate or repayment term. You then repay the larger loan.  

Both a home equity loan and a cash-out refinance are designed to give you access to cash. The main difference lies in how they do it and how many mortgages you carry. 

What do home equity loan lenders look for when you already have a mortgage?

Many of the requirements you need to meet to get a first mortgage also apply to second mortgages. Here's what it takes to get a home equity loan:

• Good credit. Lenders use your credit scores to gauge how likely you are to repay what you borrow. A good credit score and a credit history that's free of bankruptcies or delinquencies could work in your favor. 

• Home equity. You'll need some equity to get a home equity loan. You’ll need to meet the lender’s minimum equity requirement, plus have enough equity to borrow against. The way lenders measure this factor is by looking at your combined loan-to-value ratio, or CLTV. That’s the total debt against the home (mortgage plus home equity loan) compared to its value. 

• Steady income. Lenders want reassurance that you have the money to make home equity loan payments now and in the future. You may need to share pay stubs, tax forms, or other proof of income to verify your ability to pay. 

Lenders may also take a look at your debt-to-income (DTI) ratio. This ratio shows how much of your income goes to debts and housing each month. The less debt you have, mortgage or otherwise, the easier it is to qualify for a new loan.

Can you get a home equity loan with bad credit? Yes, but your credit score is a factor. You might be offered a higher interest rate or a lower loan amount. Some lenders, like Achieve Loans, may have a lower credit score requirement if you’re borrowing to consolidate debt, but a higher cutoff if you want cash to spend on other expenses.

Pros and cons of taking out a second mortgage

Second mortgages may be more appropriate for some homeowners than others. Here's how the pros and cons of a HELOC or home equity loan compare. 

Pros

• A home equity loan could put a sizable chunk of cash in your hands to use for virtually any purpose.

• Home equity loan rates tend to be lower than personal loan rates or credit card rates.

• Repayment terms are often more flexible than personal loan terms. You may have up to 30 years to repay a home equity loan, which makes it easier to borrow a large amount.

• Home equity loans don't follow you if you sell your home. You'll pay off the debt from the proceeds of the sale. 

Cons

• Home equity loans require more paperwork to qualify compared to a personal loan or a credit card. 

• Low rates aren't guaranteed. Many home equity loans and HELOCs have a variable interest rate. Achieve Loans’s home equity loan has a fixed interest rate, which protects you from future rate fluctuations. 

• A home equity loan means another monthly payment in addition to the bills you currently pay. That could strain your budget if your income changes. 

• If you don't pay a home equity loan, you risk foreclosure and the potential loss of your home. That’s in contrast to defaulting on a credit card or personal loan debt, which generally wouldn’t result in losing your home.

Consider what a home equity loan could do for you and whether it's worth it to get a second mortgage or look elsewhere for funding. For example, if you're uncomfortable with the idea of your home as collateral, you might prefer a personal loan instead. 

If you decide to move ahead with a home equity loan or HELOC, check your credit scores. Also, take a look at a real estate website to get a general idea of what your home is worth. A chat with a Loan Officer is a free way to find out if a home equity loan is an option for you.

What's next

• Use a home equity loan calculator to estimate how much equity you've built up. 

• Estimate home equity loan payments to decide what would realistically fit into your budget. 

• Compare home equity loan rates to personal loan rates or credit card rates to figure out what your most cost-effective options are.