Refinancing as an Alternative
Let’s begin with the first question. While a second mortgage is a second loan, refinancing is actually taking out one brand-new loan.
Basically, either your primary lender or a new lender will open a new loan that will pay off the primary mortgage. This is a great option even if you don’t need extra cash, as you can often get a lower interest rate. Additionally, it can get you lower monthly payments, as your lower balance is spread over the life of the loan.
Going back to our $100,000 home mortgage example above, you could choose to refinance your $60,000 for a lower interest rate and spread that out over a 30-year term. This can save you hundreds each month.
If you do need an outlay of cash, you can choose a cash-out refinance. It’s still one new loan, but it gives you money on the equity you already own. Therefore, you could do a cash-out refinance for the full $100,000.
Like a second mortgage, you would be starting over again with a cash-out refinance. However, you could most likely get a lower interest rate. Additionally, you would only have the one payment to make each month while still getting the cash you need.