3 key differences between a second mortgage and a refi cash-out loan

Cash refinancing loans and second mortgages both allow you to borrow money while using your home as collateral for the loan. But there are some important differences between them to take into account when deciding which of the two – whether one or the other – is right for you.

Here are three of the biggest differences between a second mortgage and a cash refinance loan that are worth considering if you’re thinking about tapping into your home’s equity.

1. Cash Refinance Loans Affect Your Current Loan Unlike Second Mortgages

When you take out a cash refinance loan, you use a portion of the proceeds of it to pay off your current mortgage. This means that your existing the mortgage is deleted. However, you are borrowing more with your refinance withdrawal loan than the amount it costs to pay off your existing mortgage. This is where the “cash-out” part comes in.

Because you are refinancing your existing loan, your new mortgage will have different terms, including, ideally, a lower interest rate that makes payments more affordable.

On the other hand, when you take out a second mortgage (like a home equity loan), nothing changes with your current loan. You continue to pay it off as promised, and your new loan is completely separate from your old one.

If your goal is to change the terms of your existing loan while getting cash back, a second mortgage won’t do that for you. But if you’re happy with your current mortgage and don’t want to change the payment schedule or interest rate, a second mortgage is a better bet.

2. Cash-out refinance loans leave you with one payment instead of two

If you take out a cash refinance loan, you will have a new loan that you pay off each month that will replace your old mortgage and allow you to borrow more.

You won’t have to worry about dealing with multiple lenders when you go for a cash refinance loan. However, your new mortgage payment may be higher than the old one in certain circumstances. That depends on:

  • The interest rate on your new loan compared to your old one
  • Whether you shortened or lengthened the payment term
  • The amount of equity you have withdrawn

If you get a second mortgage, however, you will have your old loan to continue paying with a new loan that also has a monthly payment. Having two payments can make paying your bills more complicated. Plus, it’ll leave you with a larger monthly obligation as you’ll add a second mortgage payment without changing your existing mortgage costs.

3. Second Mortgages Often Have Higher Interest Rates Than Cash Refinance Loans

Although a second mortgage is a secured loan that usually offers a lower rate than that offered by credit cards or personal loans, the primary mortgage holder still has the first claim on your home.

This means that the holder’s second mortgage claim on the property is not as secure as when there is only one mortgage on the house. This is because the primary lender would first have access to the proceeds from the sale of a home if foreclosure was necessary. So the rate on your mortgage on a second mortgage will likely be higher than the rate on your first mortgage – and higher than the rate on a withdrawal refi.

If you take out a cash-out refi loan, you won’t have this problem. You would have a loan, and that lender would have the primary right to any proceeds from foreclosure on your home should it become necessary. Therefore, the rate you are offered for a cash refinance loan will likely be lower than that of a second mortgage rate.

Consider these big differences between cash refinance loans and second mortgages if you want to leverage your home equity. Understanding these factors can help you make the choice that is right for you.

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