If you are considering whether or not to take out a second mortgage on your home or refinance your first mortgage there are some important facts to consider. Many people take out second mortgages on their homes or refinance to take cash out of the equity of the home, but which option is a better choice for you?
There are many reasons why people choose to take out a second mortgage rather than refinancing their home. Some of these reasons may include:
Second Mortgage Benefits
- Your first mortgage rate may be excellent, and current rates are much higher, so if you need to take some cash out of the equity in your home you should consider the current interest rates. Your second mortgage will be much lower than your first mortgage, so if the current mortgage loan interest rates are high, a second mortgage may be better. Let's say that your current mortgage has a 5% fixed interest rate, but right now the mortgage market is offering loans closer to 8% interest rates. It is better to borrow the $20,000 you want to take out of the equity in your home as a second mortgage at 8% and leave your existing mortgage at the much lower 5% than to refinance your entire $250,000 mortgage at 8%. This way, you can also pay extra money on the principle of your second mortgage to pay the higher interest rate off sooner.
- You may be able to find excellent loan terms that make refinancing your entire mortgage less desirable. Sometimes it is more difficult to get a second mortgage than a first mortgage because the first mortgage lender collects what is owed to them first and the second mortgage lender gets what is left. This also means that many second mortgages come with higher interest rates that make refinancing seem more desirable. However, if you can find a lender that offers really good loan terms on a second mortgage you may find that a second mortgage will cost you less money in the long run.
- When you refinance your entire mortgage, the fees are based on the amount you are borrowing and will be much higher than a second mortgage. If you refinance your entire first mortgage loan equaling $250,000, to take out $20,000 in equity you would pay the lender fees for the entire $250,000 rather than just on the $20,000. For instance, if your new loan requires you to pay 3 points for a good interest rate, then 3 points of $20,000 is $600, but 3 points of $250,000 is $7,500, plus the commission of your mortgage broker, which is also based on the size of the loan. In this case, refinancing can be much more costly than a second mortgage.
If you feel a refinance would fit your needs best, learn more about refinancing from Mortgage Loan Place.
If you are deciding whether to refinance or take out a second mortgage, contact many lenders to see which types of mortgages they can offer you and with what terms, and choose the option that will cost you the least amount of money to get the cash out refinance you need.