How To Know Whether To Refinance Home Or Get A Second Mortgage?
Refinancing your home mortgage is not the same thing as getting a second mortgage. While both allow you to cash out your homes equity, terms and rates differ between the two types of loans. To know which financing option is best for you, learn each loans features and pick the one that best meets your needs.
When you need money for any purpose, one source from where you can get it is cash out from refinancing your home mortgage that you can work out with the agreement of the lender. When you get the lenders approval on this idea, you can get additional money above and beyond the balance of your existing mortgage loan. In a cash out refinance program, you will be able to pay off the original home mortgage and at the same time receive cash after you settle the remaining balance in your original mortgage.
Refinancing Your Mortgage
Traditional refinancing is basically replacing one mortgage loan with another. Typically, refinancing lowers mortgage payments through lower interest rates or longer loan terms. You can also cash out part or all of your homes equity while refinancing.
Refinancing requires paying closing fees. To recoup these costs, you usually need to stay in the house for a couple of years. However, you will save money with better terms than if you choose a second mortgage.
Second Mortgage Option
Second mortgages, also known as home equity loan, have slightly higher rates than mortgages, but you have less or no closing costs. Second mortgages also only charge interest on the amount you borrow, not the total amount you are approved for. You can take out your equity over the course of several months or years. Terms vary widely between second mortgage lenders, so watch out for balloon payments or repayment fees.
If you want tap into your equity to make some home improvements but plan to sell soon, then a second mortgage would be better than refinancing your mortgage. Second mortgages also are a better choice when your current mortgage interest rate is lower than those being offered by refinancing lenders.
Factors to Consider
When deciding which financing option to choose, consider the purpose of the loan. If you want to reduce monthly payments, then refinance. If you simply want to tap into your homes equity, then apply for a second home mortgage.
Also, consider how long you want to stay in your house. You can lose money refinancing your mortgage if you dont stay in your home. However, if you sell your home or refinance, you will have to pay off your second mortgage.
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