Are you looking to tap into the equity of your home or refinance your current mortgage? If so, then you may be considering either a second mortgage or a refinancing of your current mortgage. While both may have some similar benefits, there are also distinctions worth considering.
In this article we’ll compare second mortgages and refinancing to help you determine which option best suits your current financial situation and mortgage needs.
What Is a Second Mortgage?
Second mortgages are loans taken out against the equity in a home already being used as collateral for a first mortgage. The first mortgage is usually the primary loan used to purchase the house, and second mortgages are typically taken out as additional loans on top of the first mortgage.
Second mortgages are usually offered in the form of either a home equity loan or home equity line of credit (HELOC). The two differ in how they work and what they require from the borrower.
A home equity loan is a lump sum loan that the borrower receives all at once and must pay back over time through fixed monthly payments. A HELOC, or home equity line of credit, works differently than a home equity loan because it’s a revolving line of credit in which borrowers receive loan proceeds on an as-needed basis; they make payments on the money borrowed as they continue to borrow. The interest rate on a HELOC is typically adjustable, meaning that it can change over time depending on market conditions.
Advantages And Disadvantages of Second Mortgages
Second mortgages are ideal for homeowners who need a large sum of money, have equity in their home, and want the security of fixed monthly payments.
Second mortgages offer several advantages, such as allowing borrowers to keep their current loan term without making sacrifices (e.g., keeping low interest rates on a primary mortgage). The flexibility of choosing between a lump sum loan or HELOC is another attractive benefit for homeowners.
While second mortgages have some benefits, they also have their drawbacks. Second mortgages are considered a higher risk for lenders than first mortgages, so they may carry higher interest rates. This means that homeowners who take out second mortgages may end up paying more in interest over the life of their loan, depending on their unique circumstances.
What Is a Refinance?
Refinancing is the process of replacing an existing mortgage with a new loan containing different terms. The homeowner continues to use the property as collateral for the new loan and pays off their previous mortgage with the money from this new loan.
Homeowners may refinance their mortgages to lower their monthly payments and pay off their loans faster, obtain a lower interest rate, alter the term of the loan, switch from an adjustable-rate mortgage to a fixed-rate mortgage, or access the equity in their homes.
Advantages And Disadvantages of Refinance
Mortgage refinance, which requires a homeowner to pay only a single mortgage payment each month, can help to free borrowers of financial burdens. Borrowers can adjust the terms and rates of their mortgages through this process.
However, refinancing a mortgage has potential drawbacks similar to those of a second mortgage. For example, refinancing a mortgage may require the homeowner to pay for a new home appraisal, and they may also be required to accept different (and higher) interest rates.
Refinancing may extend the term of a mortgage. This means that if you refinance your mortgage to get a lower monthly payment, you will end up paying more in interest over the life of the loan since you are technically stretching out your payments over a longer period.
Second Mortgage Vs. Refinance: Which One Is Right for You?
When homeowners are deciding between a second mortgage and a refinance, they should consider their financial goals in both the short and long term, as well as the specific terms of the loans being offered.
As always, it is advised to work with a trusted mortgage solution provider, such as our experts at Orchid Financing , to help you choose a solution that will be most financially beneficial for you.
Ask the Experts
When it comes to financing your home, Orchid Financing can help you make the right decision. We can help determine whether a second mortgage or a refinance is right for you—and then guide you through the process of getting the financing you need.
Reach out to schedule a free consultation today!