Because second mortgage is subordinated to first mortgage in the order of collection in the event of foreclosure, banks consider them as possessing higher risk. For this reason, banks often impose higher interest rates on second mortgages to justify higher risks.

Second mortgage is often taken in the form of either a Home Equity Loan or a Home Equity Line of Credit. A Home Equity Loan, or HELoan, has a fixed interest rate, and fixed monthly payments for the entire loan term. It works exactly as any fixed rate first mortgage. A homeowner borrows a predetermined amount, and pays off the loan in equal payments within a predetermined period of time. Although Home Equity Loans can be amortized over 10, 15, 20, or 30 years, the 15-year HELoan is the most often offered by banks.

A Home Equity Line of Credit, or HELOC, is a credit line from which a homeowner can borrow from or pay back as often as he wishes. Interest is calculated base on the outstanding balance for the prior month and is due monthly. Payment of the principal balance is usually not required until the "repayment" period, which is after the usual 10-year "draw" period. The draw period is the time during which the homeowner can borrow from the HELOC. Most Home Equity Line of Credit have adjustable interest rates that are pegged to the Prime Rate.