Second Mortgage or Refinance for an Investment Property?

You've spotted a killer deal on an investment property. Now you need to finance it. Should you draw down the equity on your first home to finance the deal or refinance your first mortgage to generate the cash liquidity necessary to close? Consider these points.

Your points and interest rates for your first mortgage refinancing may be different from the points and interest rates you qualify for on your second mortgage. Just because one scheme gets you a better overall rate doesn't mean you should jump at the bait, however.

You'll also need to look at any insurance requirements that your lender or bank will insist upon. In addition, check out the terms for both your first mortgage refinancing and your second mortgage initiatives. It might be that your first mortgage refinancing gives you a better interest rate in the longer term, whereas your second mortgage yields less stellar rates and a shorter term.

Then look at your 15 to 20 year financial plan to figure out how much you want to pay over that period of time. This number will likely depend on sensitive factors, such as your current income level, your expected dividends from assets, expenses relating to educating your children and retirement, and so forth.

Of course, you should also look at the cash necessary to close on both types of mortgages. When you use your home equity to finance a second property, you put your first property at risk for foreclosure if you somehow default on the loan. While refinancing your first mortgage can also get you into financial hot water if you are not careful, banks and lenders typically worry more about second mortgages than they do about first mortgage refinancing initiatives.

Take a look at the national interest rates. Don't just check out today's figures and projected rates in the near term. Also look at savings rates. You might be able to earn a significant amount of money (10 % or more) on good investments. If you take money out of your investment and put it towards a down payment on your refinancing or second mortgage, you may end up generating a lower rate of return on your initial investment.

This kind of “robbing Peter to pay Paul” investing can get maddeningly complex, and there are tax consequences involved when a homeowner shuffles his or her money around to pay for a second property investment. Learn the tax rules, so you can deduct as much as possible (often you can deduct all of your interest rate charges).