Second Mortgage vs. Refinancing

When considering the issue of getting a second mortgage versus refinancing your home, there are many factors to examine before making a decision. A second mortgage is another word for a home equity loan. A home equity loan gives you access to the money that you have accumulated in your home as equity. Equity is basically defined as the difference between the price of your original mortgage and what you've paid off. It can be more if your home has appreciated in value. Home equity loans are often taken out for a large expense like college education or home repairs. This type of loan gives you a large sum of money at one time.

The manner in which you will repay your home equity loan depends on the terms of the loan as specified by your lender. In some cases you can pay monthly payments, often more than the minimum so when the loan comes due there is no balance left. Certain loans require only interest to be paid for a certain period, but this means when the loan comes due you are responsible for the full amount of the principal. This is often referred to as a balloon payment. You can pay for this with money you have, with a new loan, or through refinancing. Your lender can help you decide on the right repayment plan for you.

Refinancing your home is a little different. Basically, you are trading your original mortgage for a new one. There are a variety of reasons you may choose to refinance. One might be to change the type of mortgage you have. There are adjustable rate mortgages (ARMs) and fixed rate mortgages. For many first time homebuyers, adjustable rate mortgages are easier to get and may offer lower interest rates in the beginning. However this type of mortgage fluctuates so your monthly payments can go up and down depending on various factors including the economic state of the housing market. A fixed mortgage has an interest rate and payments that stay the same.

You may have better credit than you did when you first acquired your ARM, or the housing market may be in good shape and it might be the ideal time to switch to a fixed mortgage. Another thing you can do with refinancing is change the term of your loan. If you have a 15-year mortgage and want to lower your payments each month, you could refinance to a 30-year mortgage. On the other hand, if you find you can make higher payments and want to build equity and pay off your home faster, you may want to shorten the term of your loan, which might also lower your interest rate. A financial advisor can help you review your money situation and help you decide what kind of mortgage term would be best for your budget and your future goals.

As you can see, there are distinct differences when it comes to a second mortgage versus refinancing. A second mortgage, or home equity loan, grants you access to a sum of money based on your equity and must be repaid. Refinancing a home allows you to change details about your mortgage to make the interest rate, payments or terms to something more favorable than what you currently have. If you are unsure of the best route to take speak to a mortgage lending professional who can educate you further on both of these subjects and advise you on what they believe is best for your financial situation and goals. There is also plenty of information online on second mortgages and refinancing for residential homeowners.