If you’re a homeowner looking to renovate, purchase another home, or cover major expenses, then a refinance or second mortgage may be the loan for you.
We’ll break down what a second mortgage and mortgage refinance are, compare them, and help you figure out which one is right for you.
What is a second mortgage?
A second mortgage is a mortgage loan that comes from your existing home equity.
Home equity is how much of the home you own. It’s determined by a couple of factors, like the balance of your mortgage and the home’s market value.
Home equity is pretty simple to figure out; subtract your mortgage balance from the market value of your home.
Say your home has a value of $250K, and you owe $100K on your mortgage—you could have $150K in home equity.
This could be ideal for significant purchases, such as student loan debt, medical expenses, or even renovating your home.
Home equity can help both potential home buyers and owners in times of inflation and higher interest rates.
Typically the requirements for a second mortgage are the same as your first mortgage. With a second mortgage, your mortgage lender will reviewing your:
- Credit score
- Home equity
- Debt-to-income ratio
- Loan-to-value ratio
Some buyers see a second mortgage as risky because it’s an additional payment to your primary mortgage.
However, if your home value is rising and you need funding, a second mortgage could provide a safe and beneficial route.
Is refinancing the same as getting a second mortgage?
Refinancing is different from a second mortgage.
When you refinance your mortgage, you use your home equity to replace your current home mortgage with a new mortgage.
Your refinanced mortgage pays off your first mortgage, rather than adding to it.
To be eligible to refinance, you must have home equity as well. Lender requirements will vary for refinancing, however, it’s usually recommended to have at least 20% in equity.
So long as you’ve paid at least six months on your current mortgage, and are current on those payments, you could be eligible to refinance your mortgage.
Though qualifying requirements for refinancing will be the same or similar to when you originally qualified for your mortgage, you’ll still need to be approved to refinance.
GO Mortgage offers two types of refinancing:
- Rate and Term Refinancing
- Cash-out Refinancing
A rate and term refinance aims to help lower your monthly payment by reducing the interest rate on your mortgage or changing the loan term. Different terms can help homeowners to pay off their mortgage quicker.
A cash-out refinance allows homeowners to borrow a lump sum amount of cash from their existing home equity. This loan replaces your current mortgage with the new, larger amount. The cash can be used as you need it, such as for debt, medical expenses, or home renovations.
Check your mortgage optionsDifferences between refinancing and a second mortgage
While both refinancing and a second mortgage require you to have home equity, there are differences to consider when figuring out which one is right for you.
Monthly Payments
A second mortgage means you are taking on another mortgage on top of your current one, so two monthly mortgage payments. Whereas refinancing replaces your existing mortgage, so you only have to make one monthly mortgage payment.
Differing Risks
A second mortgage can be risky because if you cannot make monthly payments, your home may be foreclosed and owned by the original lender. Refinancing can also be risky if you take out too much cash for a cash-out or extend your loan terms, using your home as collateral.
If you take out too much cash, you risk making it challenging to take out loans in the future. As far as loan terms, consider how much longer you’ll be paying interest on your home mortgage and whether it will cost you more in the long run.
Interest Rates
Interest rates for a second mortgage typically tend to be higher than refinancing. Lenders factor in the risk of borrowers taking on more debt, which can sometimes mean a higher interest rate.
Interest rates tend to be lower when choosing to refinance, albeit you’re taking on more money, you’re not taking on two mortgages.
Refinance vs second mortgage: Which is better?
Determining whether you should refinance or get a second mortgage depends on what would be best for your financial situation.
Use tools available that show what you can expect in either scenario, like a refinance mortgage calculator to help determine your potential refinance mortgage payment.
This includes what you can expect to pay for your monthly mortgage principal, interest, tax, and insurance.
It’s a helpful tool that can help determine which type of mortgage would be best for you.
Both refinancing and a second mortgage have their benefits as well.
The pros of a refinance mortgage include the following:
- Shorter loan life
- Lower monthly payments
- Lower interest rates
- Cash on hand with cash-out refinancing
- Funding for major expenses
The cons of a refinance mortgage include the following:
- You’ll need to go through the approval and closing process again
- Reducing term life can cause higher payments
- Home equity is based on the market, so you’re at risk of being ‘underwater’
The pros of a second mortgage include the following:
- Higher loan amount for the borrower
- Lower interest rates with home mortgages vs personal loans
- Possible tax deductions
The cons of a second mortgage include the following:
- You’ll need to go through the approval and closing process again
- At the risk of foreclosure if unable to make payments
- Higher interest rates
GO Mortgage can help
Whether you’re buying another home, making renovations, seeking better mortgage terms, or paying off significant expenses, there are many factors to consider.
GO Mortgage can help you understand your mortgage loan options.
We’ll review your credit score, financial history, and other variables to be able to provide an accurate analysis of which type of mortgage would be ideal for you.
Reach out to our team of experienced lending professionals today to learn about our offerings.
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