If you are homeowner contemplating a second mortgage loan or mortgage refinancing and don’t know which is the better option, here are several tips to help you make an informed decision. Both options have advantages and disadvantages depending on your situation. Mortgage rates are at very low levels and there are still great mortgage deals available if you can put in the time doing your homework and research mortgage offers.
What is Mortgage Refinancing?
Refinancing is simply the process of taking out a new mortgage to pay off your existing loan. When refinancing your existing loan you’ll have the option of borrowing against the equity you have in your home and using this cash for any reason. Mortgage refinancing has the advantage of one loan payment regardless of how much cash you take back from your home’s equity.
Second Mortgages Are Generally More Expensive
Whenever you take out a second loan on your home that lender assumes more risk because there are multiple loans secured by your home. This additional risk is passed on to you in the form of a higher mortgage rate. Higher mortgage rates mean higher monthly payments and with a second mortgage or home equity loan you will have to juggle your first mortgage payment as well.
There are Fees to Consider
No matter which option you choose there are fees that you’ll be required to pay. These fees include application fees, origination fees, markup of your interest rate, and closing costs. Because you are borrowing against the equity in your home you may never recoup these expenses so it is important to shop around and minimize your out-of-pocket costs.
So far I’ve talked about the disadvantages of second mortgage loans and home equity lines of credit. The main disadvantage is that these loans are expensive; however, there are some advantages to this type of financing. Home equity lines are generally more convenient and very easy to set up. Home equity lines of credit typically come with a debt card which allows instant access to your money.
Electronic access to the equity in your home can be dangerous for many homeowners who find that they are spending too much because of this ease of access. If you find yourself using this debit card to purchase groceries it is a sure sign that you have a problem with this type of loan and should cut up the card.
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