Adding a 2nd mortgage to your current mortgage can be a great option for many reasons. It gives you the ability to tap the equity in your home without touching the first mortgage – which might be a very low rate. Normally when doing a cash-out refinance you have to overwrite the first mortgage and potentially lose a lower rate. With 2nd mortgages however, you are able to avoid doing this and still tap into the equity of the home. There are two 2nd mortgages available and each has pros and cons.

• HELOC – Home equity line of credit. This is the most popular option because it provides the most flexibility and usually has no closing costs. The biggest drawback on this is the rate is fixed only for a short teaser period (currently leader offers 3.99% for 1 year) then the rate is set at prime (prime is currently 5.50%). After the fixed 1 year period the rate is going to adjust based on whatever the prime rate does.

The Payment with a HELOC is interest only for 10 years and then it becomes a fixed payment for 15 years at whatever the remaining balance is from the 10 year draw period. Interest-only payment is nice for some borrowers because it’s a lower payment than a standard principal and interest. You also only pay on what you draw – so if you take a heloc for 100k but you only use 10k you only pay interest on the 10k. You still have the ability to take out the extra 90k at any time when needed. The bank gives you a checkbook with which you can withdraw the funds at a moments notice.

• Fixed 2nd loan. A fixed 2nd is very similar to a 30 year fixed primary loan except that it is added on top of the first mortgage and as a result usually has a higher rate. The bank also charges closing costs for this product and the payment is principal and interest. This loan doesn’t have much flexibility – you simply take a lump sum of money at closing and you make monthly mortgage payments on it until its gone. If you wanted to get more money once you pay it down you would need to do a new 2nd mortgage. The big benefit to this is that the rate is fixed for the length of the loan.