There Are Several Ways to Tap the Equity in Your Home
Is a Cash Out Refinance Loan a Better Choice than a 2nd Mortgage in Today's Market?
Home equity lending became very unpopular with lenders after the financial meltdown in 2007 and 2008. However, as of 2016, lenders have brought back second mortgage programs as an alternative for customers that seek cash out without refinancing the loan they already have. Today, if you have enough equity in your house, there are many lenders who will let you borrow it for what you like. The hard part can be determining which loan is best for your situation.
The most popular types of mortgages that can give you the cash you need is a cash out refinance and a second mortgage (also known as a home equity loan).
There is no definite rule for which one is always the best. We advise that you make your choice on which loan option is best for your individual situation.
How to decide – cash out refi or 2nd mortgage? Let's lay out a few critical questions to help you make your decision:
First, how fast do you need cash? A typical cash out refinance may take over a month to close. It requires the lender do a few things:
Credit and finance review
A second mortgage also requires some financial, credit and property analysis by your lender. But it usually takes less processing and will close faster. So it is more attractive if you need capital right away.
If you are not looking for a fast influx of cash, another option is a home equity line of credit, or HELOC. This is another form of second mortgage that allows you to borrow money as you need it, up to a limit, similar to a credit card, but it is secured by your property. You get the money quickly as needed and you do not have to reapply each time you need more cash.
How Much Does It Cost?
Also, you will pay interest just on what is borrowed, not just on a big lump sum up front and paying interest on all of it from the jump. This is a good choice if you need to pay expenses over time. Say you need to improve your home over a year; this could be a good fit for you.
2nd Mortgage Versus Cash Out Refinance
When it comes to cost, a cash out refi offers very low rates as you are borrowing with a first mortgage which has lower rates. Note though that the fees on a cash out refinance are a lot higher than on a second mortgage. This is due to origination fees that are based on the amount of the loan. On the refi, you have to pay fees on the cash you are borrowing now, plus on what you are refinancing on your current loan.
On a second mortgage, you just pay fees on the cash that you get. A HELOC can avoid closing costs entirely in some cases.
How Much Do You Need?
The amount you need will also help to decide which mortgage you want. A refi makes more sense if you need a lot of cash, especially if it is a lot compared to what you owe on the mortgage. A lower interest rate on a refi can save you big on interest.
If you want to borrow less, a second mortgage may fit better because it has lower fees. This is especially true if the amount is a fraction of what you owe on your first mortgage.
How much do you like your current first mortgage interest rate? A refi is a good option if you want a lower rate. This is often why people choose to do a refinance: They just want to drop that payment by $200 or $400 or whatever it is per month.
However, if you have a great rate and payment now, you may not want to refinance. A second mortgage with a strong commitment to a fast repayment could work well for you.
However, if a refi lets you reduce your first mortgage rate by 1%, you should probably do it. You could recoup all closing costs in two years. This would offset the lower closing cost benefit of a second mortgage.
A typical cash out refinance has a 15 year or 30 year term. A second mortgage can have much shorter terms. This can save you big on interest. However, typically the rate on a second mortgage is higher than a refinance.
If on the other hand, you want to borrow a lot, a refinance of an existing mortgage can give you lower payments by letting you pay over time.
How Desperate Are You?
If you really need cash today, a HELOC will let you make interest-only payments on the loan during the initial draw period of 5-10 years. This is costly over the years, but it can help you to keep your payments low in the short term if you are short on cash. Credit lines are amazing but you have to be responsible as the payments become adjustable over-time.
What is the Bottom Line?
There clearly are myriad factors to think over as you decide between a cash out refinance and a second mortgage. There are as many 'good' decisions on this subject as there are financial situations that people face. It all boils down to your current financial situation.
Maximize Home Refinancing and Get Cash Out. -The opportunities seem endless as more and more mortgage companies have expanded their programs for homeowners to gain access to cash through the equity of their house.
To help you make a good decision, try to prioritize your short term and long term goals on a piece of paper. Doing so will help you to find the answers to the above questions, and you will then make a solid choice that makes the most sense for you. Article was written by Jenifer Stone