Why Refinancing Your Loan is Better Than a Second Mortgage

With every payment you make on your mortgage, you end up gaining a minute amount of home equity. Essentially every payment you make becomes a form of untapped money. 

However, that untapped source of money isn’t free. It’s still borrowed money that carries some risk. If you’ve built up an adequate amount of home equity, you may be wondering if refinancing your mortgage is the right choice or if you should take out a second loan. 

For some homeowners, a second mortgage may ultimately be the best option. However, recent stats show that 63.5% of homeowners that applied for a loan prefer refinancing. Keep reading to discover why refinancing your first loan on your home is better than taking out a second mortgage. 

Second Mortgage Drawbacks

Taking out a second mortgage means you’re borrowing against the equity you’ve diligently built in your home. Second mortgages are typically offered as either a lump-sum equity loan or in installments like a home equity line of credit (HELOC). 

While some homeowners may find HELOCs and equity loans beneficial, they must be aware of the several disadvantages. 

Lien on Home

The first disadvantage with a second mortgage is that it requires putting a lien on your home. By definition, a lien is when a lender can legally claim and seize your property if you fail to meet certain conditions. 

That means if you take out a second loan, you end up with two liens. The first is the primary mortgage, and the second is the new loan. 

Because there are two lenders that will want to claim your home and any proceeds in the event of a default or foreclosure, it’s likely that a second mortgage will also come with higher interest rates. 

Additional Payments and Costs

One of the biggest disadvantages of a second mortgage is that you end up responsible for two monthly payments. As stated earlier, having two loans on your home means you have two liens. That means a missed payment could cause you to lose your home.

Because of the risk, it doesn’t make sense to take out a second mortgage for ordinary costs like living expenses or for entertainment. Additionally, second mortgages come with increased loan and interest costs. 

Similar to the primary mortgage, you’ll have to pay for costs like appraisals and origination fees. These aren’t small costs. They generally add up to several thousands of dollars. 

There’s also a high likelihood of receiving higher interest rates because the lender of the new mortgage has the secondary lien. They typically offer a higher rate to mitigate their risks in the event of a default or foreclosure.

Same Loan Terms

Unless you lock in excellent terms with the absolute lowest interest rate, you’ll want to avoid second mortgages. Although these loans don’t directly impact your primary mortgage, you’re still stuck with the original loan terms. That means you can’t get a better interest rate or make the switch to a shorter-term or another type of loan. 

Benefits to Refinancing Your Mortgage

Contrary to common belief, refinancing your mortgage doesn’t mean you reset the terms of your original loan. Rather, it means that you replace the original loan with one that’s brand new. So instead of being responsible for two monthly mortgage payments, you’ll only make a single payment every month. 

Refinancing comes with several benefits, including selecting a new lender, getting a better rate and switching to a more beneficial loan term. 

Better Loan Terms, Types and Interest Rates

In the current interest rate environment, it may be possible to save thousands of dollars over the life of your loan. You not only save with lower monthly payments, but you can use those savings to pay off other debt or invest towards your retirement. 

Some homeowners wish to refinance their mortgage to reduce their loan term and pay off their homes much quicker. These borrowers are typically people that have held onto their loans for several years. 

By taking advantage of the lower interest rates, a homeowner can switch from a 30-year to a 20-year loan without significant impact on their monthly payments. 

Extra Cash to Finance Various Purposes

A benefit of refinancing your mortgage is that you have the option for a cash-out refinance. This loan type allows borrowers to access the equity they’ve built up over the years to finance various purposes. 

Some of these include home improvement projects, consolidating high-interest debt or for large medical or tuition bills. 

Removing Private Mortgage Insurance

Refinancing your mortgage also allows borrowers to get rid of pesky private mortgage insurance. However, this is only an option if a borrower’s loan-to-value (LTV) is less than 80%. 

The LTV could be lower than the required amount for several reasons. It could be due to an increase in home price, as the case has been for many homes nationwide, a reduced loan amount or a combination of both. 

Selecting the Best Option

At the end of the day, refinancing your mortgage allows you to tap into your home equity without going down the slippery slope of a second mortgage.

By refinancing, you avoid the potential to lose your home because you missed paying the additional monthly payment. Refinancing offers similar lump-sum cash payments if that’s what you’re looking for. They also have the added benefit of choosing a preferred lender offering the best loan terms and interest rates. 

Contact the lending experts at Titan Mutual Lending Inc. to see what interest rate you qualify for by refinancing today!

When refinancing an existing loan, total finance charges may be higher over the life of the loan.

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