Comparing Refinance and Second Mortgages

Second mortgages and mortgage refinancing both allow homeowners to tap into the accumulated value of their home’s equity. Both are loans that grant the homeowner access to a significant sum of money, but they function in very different ways. The guide below will detail the differences and similarities between mortgage refinancing and second mortgage loans.

What is a Second Mortgage?

A second mortgage is a loan taken out against the equity of the home, using the home itself as collateral. Second mortgages do not replace your first mortgage, nor do they change any terms of the first mortgage.

What Does it Mean to Refinance a Mortgage?

The process of obtaining a new mortgage loan to replace your existing mortgage is referred to as refinancing. The length of the mortgage, the amount paid, and the interest rate can all be changed during the process of refinancing, essentially allowing homeowners to customize their new mortgage.

How to Choose

The main question you should ask yourself is this: “Do I like the current terms of my mortgage?”

If you do, mortgage refinancing is not usually the right course of action. If interest rates have increased, you could find yourself paying more for interest if you refinance. Refinancing should be considered by those who no longer find themselves satisfied with the existing terms of their current mortgage and are in need of the money provided by their home’s equity. If you are seeking a larger amount from your home’s equity, refinancing may be the wisest choice even if you’re already satisfied with the terms of your mortgage. If interest rates have declined, you’ll not only get a better interest rate, but you will also breathe easier knowing that you’re not paying two mortgages.

Second mortgages, on the other hand, do not impact the existing mortgage that you already have on your home. They add on another debt that you must pay off, lest you risk foreclosure. Second mortgages are inherently riskier than mortgage refinancing for this reason but can be a great choice if you are trying to take out a smaller loan or feel confident that you can repay the loan in a timely fashion.

Essentially, making your decision boils down to two factors: Your existing mortgage and the level of risk that you’re willing to accept. Both processes require an in-depth look into your financial situation, including your credit report, and must be approved before you’re granted access to your home’s equity funds.