Refinance with a HELOC

"That'll be a $10 additional service charge, please." Heard that before? These days, you can hardly breathe without incurring some type of additional charge or fee. The financial industry is notorious for finding new ways to charge you. When it comes to a second mortgage refinance, it's hard to find one that isn't loaded with extra costs.

HELOC: The low-down on closing costs

The traditional refinance is usually the first financial instrument that homeowners consider. But another option worthy of consideration is the home equity line of credit (HELOC). Its low cost and flexibility make it an attractive strategy compared to a traditional refinance mortgage loan.

This type of home equity loan usually has few, or no, costs associated with closing. Compare that to a traditional mortgage, which may have closing costs of several thousand dollars.

Other factors to consider

It wouldn't be wise, however, to make refinance decisions based on closing costs alone. Consider these factors, as well:

• Most HELOCs allow you to pay interest only in the first few years, but these minimum amounts won't pay down your balance. Anything you owe at maturity will have to be paid in cash or refinanced. Plan on making large and regular principal payments throughout the term of the second mortgage.
• HELOC rates are variable. This is desirable when interest rates are dropping and not very appealing when rates are rising. In recent years, rates have gone up; therefore, if you're a HELOC owner, you've paid the price. If rates continue in their upward trend, the added interest you incur could outweigh the money you saved in closing costs.

Compare current rates of traditional mortgages and HELOCs . Run comparisons to determine what impact interest rate increases will have on you. Depending on the amount you want to borrow, a HELOC refinance may be worth the risk.

Too many products and services come with countless miscellaneous charges. It's nice to know that sometimes you can keep that ten-spot in your pocket where it belongs.