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For many homeowners who need cash in short order, a second mortgage in the form of a home equity loan or home equity line of credit is a go-to answer. A second mortgage can help you fund everything from home improvements to credit card debt payoff, and for some, a HELOC serves as a security blanket.

You can probably think of many things you could use a home equity loan or HELOC for, especially when the rate and terms may be more attractive than those of a cash-out refinance or personal loan.

Just know that you’ll need to have sufficient equity in your home to pull off a second mortgage.

What Is a Second Mortgage?

A second mortgage is one typically taken out after your first mortgage. Less commonly, a first and second mortgage may be taken out at the same time in the form of a “piggyback loan.”

Your house serves as collateral.

An “open-end” second mortgage is a revolving line of credit that allows you to withdraw money and pay it back as needed, up to an approved limit, over time.

A “closed-end” second mortgage is a loan disbursed in a lump sum.

It’s not called a second mortgage just because you probably took it out in that order. The term also refers to the fact that if you can’t make your mortgage payments and your home is sold as a result, the proceeds will go toward paying off your first home mortgage loan and then toward any second mortgage and other liens (if anything is left).

How Does a Second Mortgage Work?

A home equity line of credit (HELOC) and a home equity loan, the two main types of second mortgages, work differently but have a shared purpose: to allow homeowners to borrow against their home equity without having to refinance their first mortgage.

Rates

HELOCs may have lower starting interest rates than home equity loans, although HELOC rates are usually variable — fluctuating over time.

Home equity loans have fixed interest rates.

In general, the choice between a fixed- vs variable-rate loan has no one universal winner.

Costs

Home equity loans and HELOCs come with closing costs and fees of about 2% to 5% of the loan amount, but if you do your research, you may be able to find a lender that will waive some or all of the closing costs.

Some lenders offer a “no-closing-cost HELOC,” but it will usually come with a higher interest rate.

Example of a Second Mortgage

Let’s say you buy a house for $400,000. You make a 20% down payment of $80,000 and borrow $320,000. Over time you whittle the balance to $250,000.

You apply for a second mortgage. A new appraisal puts the value of the home at $525,000.

The current market value of your home, minus anything owed, is your home equity. In this case, it’s $275,000.

So how much home equity can you tap? Often 85%, although some lenders allow more.

Assuming borrowing 85% of your equity, that could give you a home equity loan or credit line of nearly $234,000.

After closing on your loan, the lender will file a lien against your property. This second mortgage will have separate monthly payments.

Types of Second Mortgages

To qualify for a second mortgage, in addition to seeing if you meet a certain home equity threshold, lenders may review your credit score, credit history, employment history, and debt-to-income ratio when determining your rate and loan amount.

Here are details about the two main forms of a second mortgage.

Home Equity Loan

A home equity loan is issued in a lump sum with a fixed interest rate.

Terms may range from five to 30 years.

Recommended: Exploring the Different Types of Home Equity Loans

Home Equity Line of Credit

A HELOC is a revolving line of credit with a maximum borrowing limit.

You can borrow against the credit limit as many times as you want during the draw period, which is often 10 years. The repayment period is usually 20.

Most HELOCs have a variable interest rate. They typically come with yearly and lifetime rate caps.

Second Mortgage vs Refinance: What’s the Difference?

A mortgage refinance involves taking out a home loan that replaces your existing mortgage. Equity-rich homeowners may choose a cash-out refinance, taking out a mortgage for a larger amount than the existing mortgage and receiving the difference in cash.

Taking on a second mortgage leaves your first mortgage intact. It is a separate loan.

To determine your eligibility for refinancing, lenders look at the loan-to-value ratio, in part. Most lenders favor an LTV of 80% or less. (Current loan balance / current appraised value x 100 = LTV)

Even though the rate for a refinance might be lower than that of a home equity loan or HELOC, refinancing means you’re taking out a new loan, so you face mortgage refinancing costs of 2% to 5% of the new loan amount on average.

Homeowners who have a low mortgage rate will not benefit from a mortgage refinance when the going interest rate exceeds theirs.

Pros and Cons of a Second Mortgage

Taking out a second mortgage is a big decision, and it can be helpful to know the advantages and potential downsides before diving in.

Pros of a Second Mortgage

Relatively low interest rate. A second mortgage may come with a lower interest rate than debt not secured by collateral, such as credit cards and personal loans. And if rates are on the rise, a cash-out refinance becomes less appetizing.

Access to money for a big expense. People may take out a second mortgage to get the cash needed to pay for a major expense, from home renovations to medical bills.

Mortgage insurance avoidance via piggyback. A homebuyer may take out a first and second mortgage simultaneously to avoid having to pay private mortgage insurance (PMI).

People generally have to pay PMI when they buy a home and make a down payment on a conventional loan of less than 20% of the home’s value.

A piggyback loan, or second mortgage, can be issued at the same time as the initial home loan and allow a buyer to meet the 20% threshold and avoid paying PMI.

Cons of a Second Mortgage

Potential closing costs and fees. Closing costs come with a home equity loan or HELOC, but some lenders will reduce or waive them if you meet certain conditions. With a HELOC, for example, some lenders will skip closing costs if you keep the credit line open for three years. It’s a good idea to scrutinize lender offers for fees and penalties and compare the APR vs. interest rate.

Rates. Second mortgages may have higher interest rates than first mortgage loans. And the adjustable interest rate of a HELOC means the rate you start out with can increase — or decrease — over time, making payments unpredictable and possibly difficult to afford.

Risk. If your monthly payments become unaffordable, there’s a lot on the line with a second mortgage: You could lose your home.

Must qualify. Taking out a second mortgage isn’t a breeze just because you already have a mortgage. You’ll probably have to jump through similar qualifying hoops in terms of home appraisal and documentation.

Common Reasons to Get a Second Mortgage

Typical uses of second mortgages include the following:

•   Paying off high-interest credit card debt

•   Financing home improvements

•   Making a down payment on a vacation home or investment property

•   As a security measure in uncertain times

•   Funding a blow-out wedding or other big event

•   Covering college costs

Can you use the proceeds for anything? In general, yes, but each lender gets to set its own guidelines. Some lenders, for example, don’t allow second mortgage funds to be used to start a business.

The Takeaway

What’s the point of a second mortgage? A HELOC or home equity loan can provide qualifying homeowners with cash fairly quickly and at a relatively decent rate. If you prefer not to have a second mortgage, you may want to explore a cash-out refinance, which is another way to put some of your home equity to use.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Does a second mortgage hurt your credit?

Shopping for a second mortgage can cause a small dip in an applicant’s credit score, but the score will probably rebound within a year if you make on-time mortgage payments.

How much can you borrow on a second mortgage?

Most lenders will allow you to take about 85% of your home’s equity in a second mortgage. Some allow more.

How long does it take to get a second mortgage?

Applying for and obtaining a HELOC or home equity loan takes an average of two to six weeks.

What are alternatives to getting a second mortgage?

A personal loan is one alternative to a second mortgage. A cash-out refinance is another.

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If you’re wondering, “Can I open a bank account in another country?” the answer is typically yes. Whether you are pursuing life as a digital nomad, studying abroad for a semester or two, or traveling with friends or your significant other for a few months, you’re going to need access to funds.

If you keep your American bank account, you’re likely to face a slew of foreign transaction fees, which can really take their toll on your finances.

Fortunately, opening a bank account in a foreign country is totally possible — and totally legal, as long as you’re not doing so for tax evasion purposes. However, it may take a few more steps than opening a domestic account would. Read on to learn the details.

What is Banking Abroad?

Banking abroad is pretty much exactly what it sounds like: It involves opening a bank account in a country that is not your primary or official country of residence or citizenship.

If you’re an American, this means opening a bank account in any other country, whether it’s Canada or Cambodia. Of course, some countries — such as, famously, Switzerland or the Cayman Islands — are specifically known for what are called offshore bank accounts, thanks to incentives such as high levels of financial privacy and serious deposit protections. These features can and have attracted the attention of high-net-worth individuals over the years.

But opening a foreign bank account isn’t reserved only for the ultra-rich. Regular, everyday individuals may benefit from banking abroad in certain circumstances. If you are wondering if you can open a bank account overseas because you’ll be spending the bulk of your time there, you probably can.

Is Banking Abroad Legal?

Banking abroad is legal if you’re doing so for the right reasons.

Most of us associate banking abroad with nefarious activities like money laundering or tax evasion, which are, of course, illegal — and could result in large fines or even imprisonment.

But if you’re living in or earning legitimate wages in a foreign country, opening an account there is totally legitimate. It’s also likely your best bet for avoiding excessive foreign transaction fees. It will also reduce or eliminate the hassle of having to deal with a customer service team based in a very different time zone.

Some people also open offshore bank accounts for investment purposes. If this interests you, it’s worth enlisting the help of a financial professional to ensure you’re staying above-board. Foreign investments or offshore banking for tax purposes can be quite complex.

How to Legally Bank Abroad

In order to legally open a checking account in a foreign country, you’ll usually need to verify quite a lot of personal information for the bank. This is so all the parties involved can confirm you’re banking in a foreign country for legal reasons and not engaging in illicit activities, such as tax evasion or money laundering. You will probably have to share some details with US officials, too.

So what does all that mean for you as someone interested in opening a foreign bank account?

Paperwork — potentially lots of paperwork, though it may not be that complex.

Recommended: Can You Have Multiple Checking Accounts with One Bank?

Requirements to Open a Bank Account Abroad

The specific documentation you’ll need to provide to open a foreign bank account will depend on a lot of factors. Among the variables that may impact exactly what you’ll need to provide: The specific bank you choose, the regulations of the target country, how much money you’re planning to deposit or hold in the account, and more.

Generally speaking, though, you can plan to provide the following:

•   Proof of identification, such as a passport or driver’s license

•   Proof of residence, such as a utility bill

•   Up to a year of bank statements from your current bank account in the US

•   Paystubs or a statement from your employer

•   Documentation relevant to investments or business transactions, such as sales contracts

Keep in mind that these documents may need to be notarized by a third party or sent through the local consulate for the target country in order to be deemed official. The bank will give you explicit instructions on all required documentation and may also ask for a written statement of purpose for opening the account.

Don’t overlook the home team either. The US government is likely to have its own questions about your activities. If the value of your account abroad will be more than $10,000, you’ll need to file a Report of Foreign Bank and Financial Accounts (FBAR).

Note: Interest earned on monies held in foreign savings accounts are usually still taxable here at home. Always consult with a professional if you have questions about your tax liability.

Pros and Cons of Offshore Banking

So, what are the benefits and drawbacks of offshore banking? When does opening a foreign bank account make sense? Take a closer look.

Pros

First, the upsides of opening a bank account in another country.

•   An offshore bank account can help you avoid foreign transaction fees if you’re living or doing business in a foreign country.

•   Having a bank account in a foreign country you’re living in can also make it easier to perform basic daily banking tasks without having to navigate overseas phone calls.

•   Offshore banking can have some legitimate tax incentives — though in order to take advantage of these legally, you’ll probably need to consult a tax professional.

Cons

Now, the disadvantages:

•   Opening a foreign bank account can be a relatively arduous process, with a lot of paperwork and verification involved.

•   Foreign banking can have unforeseen taxation consequences — for example, interest earned overseas may still be taxable at home.

•   You may need to file additional paperwork with the IRS if your foreign account will be valued at over $10,000.

Here’s how these pros and cons stack up side by side.

The Takeaway

The answer to the question, “Can I open a bank account in a foreign country?” is likely to be a big yes. Gathering and submitting the right documentation may take a while, but it can ease your time abroad tremendously. It can help you spend more time reveling in the local culture than wrangling your personal finances.

If you’re looking for an easy-to-use banking alternative here in the US, consider your options to find the right fit.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What countries allow foreigners to open bank accounts?

Most countries will allow foreign nationals to open a bank account on their shores as long as they can provide proof of legal residence in that country (and other necessary documentation). Some countries make it easier than others to open a foreign bank account, however.

Can I open a bank account in another country without being a citizen?

Yes, but you will likely need to provide extra documentation to verify your identity, place of residence, and the legal purpose of the account.

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SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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