April 10, 20237-minute read
Author: Victoria Araj
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You probably already know you can use the equity in your house to borrow money. You may also know you can do it by either refinancing or taking a second mortgage. But what you might not know is which option is best for you right now. Let’s take a closer look at the differences between a second mortgage and a mortgage refinance. We’ll compare both options, look at their pros and cons and help you decide which path at the fork you should take when you want to access your home equity.
What Is A Second Mortgage?
When you get a second mortgage, you borrow a lump sum of cash against the equity you have in your home. You can also choose to borrow your money in installments through a credit line and, if needed, you still have the option to refinance a second mortgage. One major condition of a second mortgage is that lenders put a lien on your home when they give you cash or a loan. A mortgage lien is a legal claim to a property that allows the lender to seize it under certain conditions. The lender that owns your primary mortgage has the first lien on your property; your second mortgage lender has a secondary lien. Let’s say you happen to default on your home and it goes into foreclosure. The primary lender gets its money back first, and anything left over goes to the secondary lender. This means that the secondary lender shoulders more risk for your loan. To offset the risk, your second mortgage will have a higher interest rate than your primary one. It’s vital to make sure you can make both payments. Losing your job or running into financial hardship may mean you’re more likely to lose your home. It’s also important to remember that you can’t access all the equity in your home, whether you choose a second mortgage or a refinance. For example, let’s say you have $100,000 worth of equity. Your lender might give you the option to access a maximum of $90,000.Second Mortgages And Mortgage Liens
The amount of equity you must leave in your home depends on a variety of factors, including your lender, your credit score and your current debt.
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Types Of Second Mortgages
There are two main types of second mortgages: home equity loans and home equity lines of credit. It’s important to note that with both of these types of second mortgages, you’ll make repayments in addition to your primary mortgage payment. What happens if your primary mortgage and your second mortgage are from separate companies? You guessed it – you’ll need to pay both lenders individually. A home equity loan is a type of second mortgage that lets you borrow against the equity in your home with a lump-sum payment. You then pay back the loan in monthly installments with interest at a fixed rate. Rocket Mortgage® is now offering its Home Equity Loan, which is available for primary and secondary homes. A home equity line of credit (HELOC) is a type of second mortgage that acts similar to a credit card, giving you continuous access to funds at a variable rate. You’ll start out with a draw period when you take out a HELOC. During this time, you can usually spend up to your credit limit without having to make any payment aside from your accumulated interest. You pay back the remaining balance in monthly installments after the draw period ends. Rocket Mortgage® does not offer HELOCs.Home Equity Loans
Home Equity Lines Of Credit
Advantages And Disadvantages Of Second Mortgages
When it comes to second mortgages, it’s important to learn the advantages and disadvantages that go along with it. Let’s take a look at both to learn whether a second mortgage might be the best option for you. Some benefits of taking on a second mortgage include: Some drawbacks of taking on a second mortgage include:Pros Of Taking Out A Second Mortgage
Cons Of Taking Out A Second Mortgage
What Is Refinancing?
You replace your primary loan with a new loan when you refinance. This allows you to choose a new lender, change your loan term, take a new interest rate or even take on a new type of loan.
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Types Of Refinancing
You can choose from different types of refinancing options. But before we get into them, let's look at what goes into the process of applying for a refinance. Applying for a refinance is very similar to your home purchase mortgage application. You’ll submit financial documentation to your lender first, and they’ll underwrite your loan. In most cases, you’ll also need to get an appraisal before you can refinance. After the underwriting and appraisal processes are complete, you’ll close and sign on your new loan. Keep in mind that you won’t get your money until a few days after closing if you take a cash-out refinance. Rate and term refinances allow you to change how your loan is set up without affecting your principal balance. You can lower your monthly payment by taking a longer term, or you can own your home faster and save on interest by shortening it. You can also refinance to a lower interest rate if market rates are lower now than when you got your loan. Cash-out refinances allow you to access your home’s equity in exchange for taking on a higher principal. For example, let’s say you have a loan with a $100,000 principal balance and you want to do $20,000 worth of repairs on your property. You’ll accept a loan valued at $120,000. Your lender then gives you the $20,000 in cash a few days after you close.Rate And Term Refinances
Cash-Out Refinances
Advantages And Disadvantages Of Refinancing
If you’re planning on refinancing, knowing the advantages and disadvantages that go with it are important when choosing. Let’s look at the pros and cons of refinancing. Some benefits of refinancing include: Some drawbacks of refinancing include:Pros Of Refinancing
Cons Of Refinancing
Is It Better To Get A Second Mortgage Or Refinance?
Choosing between a second mortgage and refinancing is different when it comes to each person and their financial situation. If you’re not sure, let’s look at some of the reasons you might choose one option over the other. Choose a refinance if you want to change your loan’s rate or term. You can’t change the terms of your loan with a second mortgage. A cash-out refinance might be right for you if your goal is to consolidate debt or need to pay for a large expense and you have plenty of equity. You’ll need to cover closing costs, but interest rates are lower on cash-out refinances compared to second mortgages. If you need a lump sum of cash but you don’t want to change your mortgage terms, a second mortgage could be the best choice for you. You’ll pay a bit more in interest on a second mortgage than your primary loan, but you’re guaranteed to keep your current interest rate on your primary loan. This isn’t always guaranteed when you refinance.When Should You Refinance?
When Should You Get A Second Mortgage?
The Bottom Line: Knowing The Differences Between Refinance And Second Mortgage Can Help You Decide
A second mortgage is a loan or line of credit you take against your home’s equity. You can access your equity with a single lump sum or as a revolving line of credit during the draw period. Second mortgages allow you to use equity without altering the terms of your original mortgage. However, they also add another payment to your monthly budget and often have higher interest rates. Second mortgages are best if you already have a good interest rate on your mortgage and need extra funds for a home repair or a child’s college education. Refinancing allows you to access equity without adding another monthly payment. However, you’ll also need to pay more at closing to finalize your new loan. Cash-out refinances are best for consolidating large amounts of debt. You can change your loan’s rate or term when you refinance. Think a refinance is the best option for your situation? Start the refinance process today with help from Rocket Mortgage.