Third-lien home equity loans
If you already have a first mortgage and a HELOC or second mortgage, a third lien lets you borrow more without disturbing either.
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Can you get a third-lien home equity loan?
Yes, but few lenders make third-lien home equity loans, because they're repaid last in a sale or foreclosure. Expect a lower combined loan-to-value cap, a higher rate and stronger credit requirements than a second lien. A third lien makes sense when both existing loans have rates you don't want to give up.
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When it fits
- Your first mortgage rate is low and your existing HELOC or second has good terms.
- You have meaningful equity left after both loans.
- You need a defined amount, often for a project or a payoff.
Use a free calculator, or get your HELOC rate from Shawn.
Alternatives to compare
- Increase the limit on your existing HELOC, if the lender allows it.
- Refinance the HELOC and the new money into one larger second lien.
- A cash-out refinance, if your first mortgage rate is near today's.
Texas homeowners: state rules allow only one home equity loan of this type on a homestead at a time. Texas rules.
These are the situations where shopping more than 180 lenders matters most: one lender's "no" is often another's standard loan. Tell us about your situation.
Example
A home worth $900,000 with a $400,000 first mortgage at 3% and a $150,000 HELOC. Combined debt is $550,000, about 61% of value. A third-lien lender capping combined debt at 75% would allow about $125,000 more. Rates are typically several points above a second-lien HELOC.
Existing lenders and subordination
A third lien doesn't need the first lender's permission, but check your HELOC agreement: some prohibit additional liens and could freeze or call the line. Future refinancing gets harder, since a new first-mortgage lender needs both junior lenders to agree to stay behind it.
Compare first
- A larger HELOC that pays off the current one, keeping you at two liens.
- A cash-out refinance, if your first-mortgage rate isn't far below today's.
- A home equity agreement, which can sit behind existing loans.
Before you apply
- Read your HELOC agreement for restrictions on additional liens.
- Get balances and rates for both existing loans.
- Compare the third lien's cost with a larger HELOC that replaces your current one.
- Plan how you'd refinance later; three lenders must cooperate.
When a third lien makes sense
A homeowner holds a 2.75% first mortgage and a HELOC fixed at 5% on most of its balance through a lock. She needs $60,000 for a short-term business need that she'll repay within two years. Replacing either existing loan would cost far more over time than a few years of a higher third-lien rate. In a case like this, a small third lien with a short payoff can be the cheapest overall choice despite its higher rate.
Related question: Can you have two HELOCs?
Also asked
Do I need permission from my first and second lenders for a third lien?
Not usually from the first mortgage lender, but check your HELOC agreement; some prohibit additional liens.
Are third-lien home equity loans risky for borrowers?
Somewhat. Third-lien loans cost more than second liens, and refinancing later gets harder because every junior lender has to agree to stay behind a new first mortgage.
Is a home equity agreement better than a third lien?
Sometimes, if you can't qualify for a loan payment. A home equity agreement has no monthly payment and can sit behind existing loans, but it can cost far more than a third lien if your home appreciates.
What credit score do third-lien lenders want?
Third-lien lenders usually want a higher credit score than second-lien lenders, often 680 to 720 or more, along with low debt-to-income.
How much can I borrow on a third lien?
Third-lien lenders often cap combined loan-to-value at 70% to 80%, lower than for a second lien. On a $900,000 home with $550,000 already owed, a 75% cap would allow about $125,000 more.
Can a third lien be a home equity line of credit?
Rarely. Most third-lien products are fixed loans rather than lines of credit, so a third lien usually suits a defined amount, such as a project or a payoff.
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Sources
Official sources behind this guide.
- What is the difference between a home equity loan and a HELOC? · Consumer Financial Protection Bureau
- What you should know about home equity lines of credit (booklet, PDF) · Consumer Financial Protection Bureau
- Regulation Z §1026.40: Requirements for home equity plans · Consumer Financial Protection Bureau
- Find a HUD-approved housing counselor · Consumer Financial Protection Bureau