Refinancing your home to cash out some equity can be expensive. There may be lender fees, title, escrow, and appraisal charges, and other expenses which may add up to thousands of dollars. If you can lower your interest rate or gain more favorable terms than your current mortgage (such as exchanging an ARM for a fixed rate), refinancing costs may prove to be a smart investment. However, if your current interest rate is market price or lower, and you want to avoid the costs of refinancing, consider a second mortgage loan instead.  

Lenders today offer no-cost and low-cost fixed rate second mortgages and home equity lines of credit. The lender will often pay for the title and escrow on your second mortgage loan and waive an appraisal fee if your combined loan to value (CLTV) is within certain established limits. There is usually a trade-off between loan costs and the interest rates--if the loan is a short term deal, go with lower costs. If it's going to be around for 15 years, run the numbers and see if the monthly savings with a lower rate is worth the higher upfront fees.

Borrowers can choose an equity line of credit or a fixed rate home equity loan.  Home equity lines of credit (HELOCs) are revolving accounts and work like credit cards--you can draw what you need and reuse it over and over--offering maximum flexibility. HELOCs carry variable interest rates based on the prime rate. They feature interest-only payments the first ten years and then become fully amortized over the next twenty years. To stay competitive with lower interest rate second mortgages, or home equity loans, lenders are now allowing borrowers to fix the rate on all or a portion of their home equity line balance.

Fixed rate second mortgages loans are generally amortized over thirty years, but due in fifteen years--keeping the payment lower and stable but leaving the borrower with a balloon payment due at the end.  When long term interest rates are lower than short term rates, fixed rate second mortgages carry lower rates than HELOCs.  Neither loan usually comes with a pre-payment penalty; however, lenders will often charge an early closure fee of approximately $500 if second mortgage products are paid off within three years.

While second mortgage loans are offered at a higher rate than first mortgage products, their flexibility and reduced cost to the homeowner are quite compelling for accessing home equity cash. Qualification for a second mortgage is basically the same as a first mortgage and lenders will need to take a home mortgage application and verify your credit before approving your loan. Rates and terms vary so checking with several lenders either online or in person can pay off in a better deal on your second mortgage.>