Both traditional seconds as well as home equity lines of credit are technically considered second mortgages. With a long-established second mortgage, the rate is typically fixed and all funds are paid out at closing. The term of the mortgage could be anywhere from 15 to 30 years. With a Home Equity line of credit, as the name implies, the funds are drawn from a credit line account as needed and not paid out in a lump sum at closing. The rate on the credit line is naturally an adjustable (usually tied to the prime rate index) and the term can be somewhere from 15 to 30 years. Home equity lines have a draw period, typically occurring in the first 10-15 years, with the lasting term on the loan referred to as the repayment period

Is it better to refinance my first mortgage to take cash out rather than getting a second mortgage on my property?

First determine how competitive your existing first mortgage rate is relative to where current interest rates are. Also, evaluate how many years you have paid into your existing first mortgage. For example, if you have been making payments for only several years and today's market rates are close to where the rate on your existing first mortgage is, then you may want to consider refinancing your first. Conversely, if the rate on your accessible first mortgage is significantly lower than that of current market rates and if you have been making payments on your mortgage for a period of five years or more, then a second mortgage may be a more reasonable financial solution than starting over with a new first loan. Consultant with your financial advisor for an optimal decision.

How do I determine which type of secondary home equity financing is best for me?

A reasonable guide for making this decision is to evaluate your intended use for the funds. If you have a pre-determined cost that will require a lump sum or fixed payment (i.e. major home improvements for which you have a written estimate) then you may prefer a traditional second mortgage with rate and term that are fixed for the life of the loan. Conversely, if you have a flow of undetermined expenses (i.e. misc. home improvements, misc. consumer purchases) then you may prefer the check writing convenience of a home equity line. With a home equity line of credit, you pay interest only on the funds you use or need, therefore with unpredicted expenses this may be the most cost-effective approach.

The amount of home equity you have in your property will in large part determine the answer to this question; the greater the amount of Home Equity , the lower the documentation supplies. Also consider the tendency of lenders to provide lower interest rates for borrowers willing to document their income. Most lenders will require at least a current paystub and W-2's (1040's will be requested of the self-employed) yet others may request no documentation at all. But, if a lender is offering a knockout rate and terms, then a complete loan package may be warranted.