Is it better to refinance or get a second mortgage?

second mortgage

Is it better to refinance or get a second mortgage?

There are several ways that homeowners can access cash from the equity in their homes, but by far two of the most popular ways are refinancing your mortgage or obtaining second mortgage. Both of these strategies allow homeowners to get a lump sum of cash (with refinancing the maximum of their home equity is 80% which can be obtained and, with a second mortgage the maximum of their home equity is 85% which can be obtained) to be used for whatever purpose the homeowner chooses.

Homeowners looking to access cash, often wonder which method – refinancing or getting a second mortgage – is better. The answer? It depends.

To understand which option is likely to be better for you and your situation, it is important to understand what these options are and the differences between the two.

What is Mortgage Refinancing?

Mortgage refinancing is when you break your mortgage to get a new one. If you are refinancing in order to access home equity, your new mortgage will be for a higher amount than your existing one and you will receive the difference in cash. Let’s say for example, you owe $100,000 on your current mortgage and you want to refinance to access $20,000 from your home equity. Your new mortgage after the refinance would be $120,000 and you would receive $20,000 in cash.

What is a Second Mortgage?

A second mortgage is a loan against the equity in your home but it does not require you to break your first mortgage. Following the example above, if you opted for a second mortgage than you would still have your first mortgage of $100,000 and you would have a second mortgage of $20,000 while receiving $20,000 in cash.

So, which is better?

The main factors you will need to determine which option is better for you, such as; what is the interest rate you are able to obtain, how close are you to your mortgage renewal date.

Generally speaking, in most cases, you will be able to get a better interest rate by refinancing rather than getting a second mortgage.  With that being said, when you break your first mortgage during the refinance, there will be a financial penalty. The farther away your mortgage renewal date is the higher that penalty is likely to be.

In most cases, a mortgage refinance is seen as the better choice for those who are close to their mortgage renewal date and a second mortgage is seen as the better choice for those who are further away from their mortgage renewal date. If you are unsure of which option is best for your situation, then working with a mortgage broker can give you a better understanding as they are able to help with running some calculations for your based on your financial situation.

If you would like to learn more about second mortgages and mortgage refinancing and how it can be of benefit to you, feel free to contact my office today. I would be happy to help.

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