Home improvement projects are an integral part of home ownership. In time, you’ll always find something that needs repair or upgrading. If are making monthly mortgage payments, you may be wondering how you can swing the additional expense of fixing up your home. Second mortgages and cash-out refinancing are two home improvement financing options to consider.

Understanding Second Mortgages

A second mortgage is another loan you can take out when you already have a mortgage on your home. Collateral for a second mortgage is your home equity. Second mortgages get their name from the fact that they are given second priority if you are unable to pay. Your primary mortgage is the one you’ll have to pay first if you find yourself in financial difficulty.

Second mortgages can be used for many purposes including:

• Debt consolidation
• Eliminating private mortgage insurance requirements (The second mortgage must be at least 20 percent of home’s value.)
• Home improvements
• Investment opportunities
• Second home purchase.

Choosing a Second Mortgage

To apply for a second mortgage, you’ll want to compare rates and terms from reputable lenders. You can then fill out a short form with no obligation with each prospective lender and compare quotes.

Most lenders will allow you to borrow up to 85 percent of your home’s appraised value, with your first and second mortgages combined. If your needs exceed that amount, you can find some lenders in all states (except Texas and West Virginia) who will loan up to 125 percent of the value of your home.

Second mortgages usually have shorter terms than first mortgage loans. Expect between 15 to 30 years to repay these loans.

Second Mortgage Cautions

While a second mortgage is a fairly simple way to get cash you need for home improvement projects, be aware of these second mortgage concerns:

• Higher interest rates than first mortgages
• Large second mortgage fees
• Risk of losing your home if you’re unable to make your payments.

Cash-Out Refinance Mortgages

A cash-out refinance mortgage is another way homeowners can get cash for home improvement projects. When you choose cash-out refinancing, you’ll refinance your home for more money than you owe, and keep the difference to spend as you choose. Here are a few cash-out refinance basics:

• Cash-out refinance replaces your current mortgage, and in most cases, only makes sense if you can get lower interest rates than your original mortgage.
• If interest rates have gone down since you took out your mortgage, you may be able to enjoy lower monthly payments, even with the extra cash to spend.
• You don’t need equity in your home.
• You’ll have to pay closing costs, as with any mortgage.