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What Is a Closed-End Second Mortgage and How Does It Work?

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SmartAsset Team

Sat, Mar 22, 2025, 9:08 AM 5 min read

A homeowner researches how a closed-end second mortgage works.

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A closed-end second mortgage is a type of home loan that allows homeowners to borrow against their home's equity while keeping their primary mortgage unchanged. This type of loan provides a lump-sum payment upfront with a fixed repayment schedule and interest rate. Unlike a home equity line of credit (HELOC), which allows for repeated borrowing and repayment, a closed-end second mortgage offers a one-time loan amount that cannot be borrowed again once repaid.

A financial advisor can help you determine if a closed-end second mortgage aligns with your financial and homeownership goals.

A closed-end second mortgage is a fixed-rate, lump-sum loan that lets homeowners tap into their home's equity without affecting their existing mortgage. This type of loan is considered a second mortgage because it is subordinate to the primary mortgage, meaning that the original mortgage lender gets repaid first in the event of foreclosure.

Unlike open-ended loans like home equity lines of credit (HELOCs), which allow for continuous borrowing and repayment, closed-end second mortgages provide a single disbursement that must be repaid over a fixed period, often ranging from five to 30 years. The interest rate is typically fixed, making it easier for borrowers to budget for consistent monthly payments.

Lenders determine eligibility for a closed-end second mortgage based on credit score, home equity and debt-to-income ratio, in addition to income stability. Generally, homeowners need at least 20% equity in their home to qualify. The amount that can be borrowed is usually limited to 85% of the home's total value, including the first mortgage balance.

A closed-end second mortgage functions as a standalone loan secured by a home's equity. After approval, the homeowner receives a lump-sum payment from the lender that must be repaid in fixed monthly installments over the loan term. The borrower cannot draw additional funds from the loan, which distinguishes it from a HELOC and its accompanying credit line.

Let's take a look at an example to see how a closed-end second mortgage works. Suppose a homeowner has a property valued at $400,000 with an existing mortgage balance of $250,000. If the lender allows borrowing up to 85% of the home's value, the maximum loanable amount would be:

$400,000 * 85% = $340,000
$340,000 – $250,00 first mortgage balance = $90,000 in equity

This shows that the homeowner can apply for a closed-end second mortgage up to $90,000.

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