Second mortgage loans have traditionally been a great alternative to mortgage insurance (MI) for borrowers who did not have a 20% down payment to purchase a home. Instead of writing a first mortgage greater than 80% of the purchase price (which requires MI), lenders allowed borrowers to take a first mortgage of 80% and a second mortgage of up to 20%. Seconds also allow homeowners to extract equity and pay for home improvements, investments, or debt consolidation.

A few years ago, home equity lines of credit, or HELOCs, became the second mortgage of choice. Characterized by a lower starting interest rate and an interest-only payment option, the HELOC all but put fixed rate seconds out of business. Today, however, with long term interest rates still near historic lows, fixed rate second mortgages or home equity loans are popular once again.

After seventeen consecutive interest rate increases by the Federal Reserve, payments on HELOCs increased alarmingly. Concerned about futurerate hikes, borrowers began to return to fixed rate second mortgages, or home equity loans, for payment stability. And recently, as short term interest rates (those on which a HELOC is based) rapidly increased, the fixed long term interest rates (which drive the rates of fixed rate second mortgages) fell.  Finally, many borrowers wanted a more stable rate and payment, and to fully amortize their second mortgages and retire them at some point.

Today, fixed rate second mortgages or home equity loans will generally price significantly lower than a home equity line of credit. In addition to being more expensive to get, the HELOC carries an adjustable rate and is therefore less stable. The repayment period on a HELOC differs from a fixed rate second mortgage as well. A home equity loan is generally a 30 year loan due in 15 years. This means it is amortized over 30 years to determine the monthly payment, but there is a balloon payment at the end of 15 years. This keeps payments stable and relatively low. A HELOC is amortized over thirty years with an interest only draw period the first 10 years and then a fully-amortized repayment period of 20 years. If the repayment kicks in when rates are high, the HELOC payment could increase dramatically.

 Fixed rate second mortgages are not expensive to get. Like the HELOC second mortgages, lenders offer borrowers low and no cost home equity loans, making it easy for qualified borrowers to access their home equity. Qualification for a second mortgage loans is similar to that of a first mortgage: decent credit, income, assets, and equity to borrow against determine whether or not you are approved, and influence the interest rate you will pay.