Are all Second Mortgages Created Equal?

Americans place a high premium on being number one. But, there's one arena-mortgages-in which being number two isn't so bad, especially for you, the consumer.

A second mortgage is a second lien on your property. Lining up right behind your first mortgage, it allows you to borrow against the remaining equity in your house. For example, if your house is worth $200,000, and the principal balance of your first mortgage is $160,000, you have $40,000 in equity remaining. With a second mortgage, you can tap that remaining $40,000 via a home equity loan.

There are two types of 2nd mortgages, each allowing you to take advantage of different types of mortgage rates. They've been developed to attract consumers during both high and low interest rate climates.

Fixed-Rate Home Equity Loan: In regards to second mortgage rates, this type of equity loan is fixed. Since your rate is set in advance, your monthly repayment is stable. This provides you with a hedge against rising interest rates. Even though the rate might be higher than that of your first mortgage, the smaller means that your monthly payments won't be as hefty.

Home Equity Line of Credit (HELOC): By far, the more flexible of the two loans is the HELOC, which works a lot like a credit card. You're given a credit line and you can borrow against it. When you withdraw funds, you begin paying interest. While you do have greater flexibility with the HELOC, you're subject to variable 2nd mortgage interest rates. As a result, when rates spike, so do your payments.

Being number two isn't so bad when it means helping you meet your financial needs. Fixed-rate home equity loans and HELOCs are second mortgages that can help you consolidate debts or free up cash for home improvements or college tuition. That's why, for many consumers, second mortgages are a first-rate financial solution.