Should You Refinance Or Get A Second Mortgage?

By: J Suffie

If you're like many people these days, you may be considering options for taking additional money out of your home and have begun to look at cash-out refinancing and second mortgages. You may be wondering how they compare and which option is best for your personal financial situation.

A cash-out refinance is when you obtain a new mortgage in order to get a sum of money out of your equity. You can also refinance in order to obtain better terms, such as a lower interest rate, on your current mortgage. The process of any type of refinancing involves paying off your current mortgage and starting over with a new mortgage.

A second mortgage is just what it sounds like. It is a second mortgage that is taken out against your home, in addition to your first mortgage. When you have a second mortgage, you have two separate mortgage payments, sometimes with different mortgage companies. The second mortgage is subordinate to the first mortgage. The interest rate is generally higher on second mortgage because there is more risk to the lender. If you default on your mortgages, the first loan gets paid off first. There are such things as third and even fourth mortgages, but they aren't very common. Just as the second mortgage is subordinate to the first, the third is subordinate to the second and so on. The increasing risk on the part of the lender results in higher interest rates for you.

You may be wondering what things you should take into consideration when you are deciding between a cash-out refinance and a second mortgage.

Consider the current interest rate situation in comparison to your current mortgage. If for example you have a fixed rate mortgage at a low rate, you shouldn't refinance at a higher rate just to access the equity in your home.

If you are up against the ropes and simply need the money as soon as possible, getting a second mortgage may be a better option. While many cash-out refinances require more processing, such as appraisals, underwriting and title searches, which can take some time to complete, most second mortgages don't require as much processing, which cuts a lot of time out of the process.

There are many more factors that should be involved in your decision of whether to get a second mortgage or do a cash-out refinance. These include such things as how long you plan to own the home, the balance on your mortgage, the amount of money you want to take out, and the past, present and expected future value of your home.

If you don't have a broker that you trust very well, be careful of using their advice as your sole source of information on this decision, as there certainly are dangers to refinancing. A cash-out refinance of your entire mortgage of $300,000 will involve the broker earning more money than on a second mortgage of $25,000. Your broker may steer you toward the option that will earn them more money rather than the option that is best for you in the long run.

In order to help determine which option is the best for your personal financial situation and your cash needs, there are second mortgage vs. cash-out refinance calculators online that are designed to help you make a decision.

Just by doing a little bit of homework on your options and their future impact, you will be able to guide the process much better when you do sit down with a mortgage professional.

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