Refinancing Vs. Second Mortgage

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Deciding whether to refinance or take out a second mortgage depends on your goals.
Deciding whether to refinance or take out a second mortgage depends on your goals. (Image: home 3 image by Stacey Lynn Payne from <a href='http://www.fotolia.com'>Fotolia.com</a>)

It’s time to do something about the mortgage, but you’re not sure which path to take. A complete refinance may lower the interest rate and payment amount. A second mortgage would give you enough to consolidate credit card debt, lowering the payment amount and interest rate while leaving the current mortgage on its own schedule. Which way is best? Choosing between a refinance or second mortgage could save you thousands of dollars.

Goals

An overall refinancing strategy may be advantageous when mortgage interest rates sink. If the homeowner has a variable rate mortgage or a higher fixed rate loan, this is a chance to permanently lock in a new, lower current rate for the life of the loan. If cashing out home equity by increasing the loan size for home improvements, a refinance may make sense because these improvements increase the value of the home over the long term, helping justify the longer length of time it takes to repay most mortgage refinances. For other, short-term needs, a second mortgage--often called a home equity loan--allows the homeowner to continue paying on the original primary loan while still achieving a lower interest rate than most consumer debt options.

Refinancing makes sense when interest rates fall on new loans.
Refinancing makes sense when interest rates fall on new loans. (Image: silver bevel symbol percentage image by PaulPaladin from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Savings

Both a second mortgage and refinance are tax-deductible, but a mortgage refinance may include deductible costs, such as points and mortgage fees. Although difficult, the homeowner should compare total savings between new payment amounts, amounts saved on any other debts retired with proceeds and differences in deductible expenses before subtracting the costs to refinance.

A refinance and second mortgage are both tax-deductible.
A refinance and second mortgage are both tax-deductible. (Image: TAX TIME image by brelsbil from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Time Frame

A second mortgage is generally 10 or 15 years in term. A refinance may lengthen the mortgage by 15 or 30 years, unless the homeowner pursues a non-conventional time frame or a rate-and-term mortgage, which continues the current mortgage without increasing its length or altering the current amortization schedule. These non-conventional mortgages are hard for firms to package into securities and are therefore difficult for homeowners to secure. Homeowners looking for small amounts of money may find a second mortgage at a lower cost and quicker time frame than a complete refinance.

Refinancing your home may lengthen the loan by 15 or 30 years.
Refinancing your home may lengthen the loan by 15 or 30 years. (Image: mortgage image by hans slegers from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Costs

Although fees range widely, refinance costs can be $2,000 to $3,000 higher than a second mortgage. The second mortgage, however, usually has a variable interest rate which could cost the homeowner more in a rising interest rate environment. Homeowners should ask lenders about prepayment penalties, points, escrow fees, title insurance, application fees, credit report fees and other costs added by a broker or bank. Homeowners should receive a truth-in-lending statement detailing all loan fees before applying.

Ask for a truth-in-lending statement to review all fees before borrowing.
Ask for a truth-in-lending statement to review all fees before borrowing. (Image: fistful of dollars. image by Greg Carpenter from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Threats

Financial guru Dave Ramsey and others warn about turning short-term credit card debt into a long-term liability. When paying off credit cards with a second mortgage or refinance, homeowners still haven’t attacked the roots of a credit card problem and risk running up the credit cards again while inflating the mortgage. Without a solid debt reduction strategy, a refinance could be doomed from the beginning.

Resolve spending problems before rolling debt into a refinance or second mortgage.
Resolve spending problems before rolling debt into a refinance or second mortgage. (Image: bank statement and cut credit card image by Warren Millar from <a href='http://www.fotolia.com'>Fotolia.com</a>)

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