Second Mortgage or Refinance?

When a homeowner wants to make considerable upgrades to the home or just pay off old debt, he has two choices – to take out a second mortgage or to refinance the existing mortgage. To do either, there needs to be enough equity in the home. Equity is what the home is worth minus what is still owed. Mortgage lenders and banks will generally only loan an amount that is less than or equal to the equity. Depending on the homeowner’s credit, he may qualify to borrow 100 percent of the equity, or he may be restricted by a loan to value amount. Common loan to value amounts are 80/20 and 75/25. This means the bank will loan you 80 percent, or 75 percent, of the value of the equity in the home. So if you had $100,000 equity in your home, you could expect to be able to borrow $75,000 or $80,000 with a second mortgage or home equity loan.

Interest rates differ for each type of loan and rates change often. When a homeowner is determining whether to take out a second mortgage or refinance, he should check the interest rates and the fees for each type of loan. Refinancing includes closing costs and may, depending on the loan, carry points that will need to be paid up front, as does getting a second mortgage.

There are some benefits to refinancing. If national interest rates are lower, the homeowner may be able to refinance with a lower interest rate. A refinanced mortgage is less risky than a second mortgage, so will generally have a lower interest rate. A second mortgage is an entirely separate loan, presenting another monthly bill and another check to be written at bill paying time.

Should the homeowner be foreclosed on because he is paying only one of the loans, he may have to keep paying the second mortgage or home equity loan while the primary loan is being foreclosed on. Also, depending on state laws, the homeowner may still be responsible for the second mortgage after his property is auctioned off, as the first mortgage takes precedence at an auction sale.

Depending on the homeowner’s situation, a refinance may be better than a second mortgage – or vice versa. Only the homeowner can make that decision, and he should be sure to take into consideration the requirements for refinancing or a second mortgage, including interest rates, how the loan will be paid and the amount of money available (loan to value) for a second mortgage or refinance.

Learn more about the different types of mortgage loans available.

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