Second homes account for a full 40% of all homes sold in America. According to a recent annual report by the National Association of Realtors (NAR), 27.7% of all homes purchased in 2005 were investment properties and 12.2% were vacation homes. About 65% of second-home owners surveyed by the NAR said they considered their second homes better investments than stocks, and 29% said they planned to buy additional properties within two years.

Cash-out mortgage refinancing and second mortgages are typically the ways homeowners finance second home down payments, home improvements and home construction on primary residences and second homes. A cash-out mortgage refinance involves refinancing an existing mortgage with a higher borrowed amount, which results in a single loan and loan payments that can be stretched over a long term. Cash-out refinances typically have lower interest rates than second mortgages, and can either be fixed mortgage rate loans or adjustable rate mortgages (ARMs).

A second mortgage is a subordinate loan on the same property. The main two types of second mortgages are fixed interest rate home equity loans and adjustable rate home equity lines of credit (HELOCs). A home equity loan is generally a lump sum loan, and a HELOC is a revolving credit line, similar to a credit card, where interest is only paid on the amount borrowed. Second mortgages provide homeowners with more flexible options when it comes to spending and repayment. Depending on the homeowners needs, they can borrow all or some of the homes equity. Second mortgages also offer homeowners the choice of a short-term or long-term loan.

The decision to cash out equity with a mortgage refinance or to apply for a second mortgage depends primarily on your needs and your ability to repay the new loan. If you have a low interest rate and favorable terms on your existing mortgage, you may want to consider a second mortgage for financing the down payment to purchase your investment property or for buying a vacation home.