Second Mortgage vs. Refinancing: What to Know
Two of the most common ways to tap into your home equity include a second mortgage and a cash-out refinance.
In this article, we’ll dig into the differences between each type of loan, and help you determine which is the better option for you.
What’s the difference between a second mortgage vs. refinancing?
A second mortgage and refinance both allow the borrower to access their home’s equity and use the funds however they choose — they just go about this goal in different ways.
Common ways to use home equity include:
- Debt consolidation
- Home improvements or renovations
- Real estate investments
- Business expenses
- College education
- Wedding expenses
- Emergency expenses
Let’s take a look at the main differences between a second mortgage and refinancing to help you determine which loan makes more sense for you.
Second mortgage
A second mortgage is appropriately named: It’s a second mortgage you take out in addition to your original or first mortgage, and it takes a “second position” to your first.
Second mortgages most commonly are structured as home equity loans or a home equity line of credit (HELOC).
These loans allow homeowners to borrow against their home and tap into the equity either with a lump sum (home equity loan) or a revolving line of credit (HELOC).
Remember, your home equity is built up as you make your monthly mortgage payments, make improvements to your home, or as your home naturally increases in value over time.
To quickly calculate your home equity, subtract your remaining mortgage balance from your home’s value.
If your home is worth $350,000 and your mortgage balance is $285,000, you have $65,000 of equity in your home that you can pull from with a second mortgage.
What’s your loan scenario?
Refinance
The most common refinancing options include a rate-and-term refinance and cash-out refinance.
A rate-and-term refinance allows a homeowner to get a new mortgage rate and terms, while a cash-out refinance allows you to update your rate and terms and access the equity in your home.
Cash-out refinances work like this: You replace your primary mortgage with a new, larger mortgage, and take the difference in a lump sum of cash.
When mortgage rates are low, a cash-out refinance is a great option because borrowers can tap into their equity and reduce their interest rate while they’re left with one mortgage payment instead of two.
However, when mortgage rates are on the rise, a cash-out refinance means you’ll have to give up a lower interest rate to tap into your equity.
Fortunately, Marquee Funding Group has a solution: a cash-out option that can take any loan position: 1st, 2nd, 3rd, and even 4th.
You won’t find this option with traditional lenders such as banks.
When should you refinance?
Refinancing is a great option when mortgage interest rates are falling.
This was the case in 2021 when rates fell to record lows and home values skyrocketed.
At the time, a cash-out refi was the perfect option because it allowed homeowners to tap into a lower rate while taking out record amounts of home equity due to high home prices.
But when mortgage rates are on the rise, it’s not only more difficult to qualify for a cash-out refi with traditional lenders, but you’ll have to give up your low-interest rate to access your equity.
Second mortgages leave your first mortgage intact, so you can pull out cash and keep your original low rate.
When should you apply for a second mortgage?
Borrowers should consider applying for a second mortgage loan if they want a quick, easy way to access the equity in their property without touching their primary mortgage or applying for costly personal loans.
A cash-out refinance with a bank can be enticing because you won’t end up with two mortgage payments, but the costs to refinance actually may far outweigh the benefits.
You’ll have to factor in closing costs equivalent to your first mortgage, plus you’ll have to re-qualify.
Hard money lenders make the second mortgage process much simpler than traditional lenders by offering more flexible options and a faster turnaround.
Is it better to get a second mortgage or refinance?
The decision to get a second mortgage or refinance your first mortgage depends on your goals.
If you’re looking for a new interest rate and terms, you should refinance. But if you want to keep your original mortgage intact, a second mortgage is your best option.
Your first step to getting a second mortgage is to connect with a mortgage lender who offers this type of loan.
Traditional lenders are currently offering more second mortgages to borrowers to fulfill a need left behind by the lack of refinancings, but that doesn’t mean they are easy to qualify for.
Traditional mortgage lenders have a long list of requirements, including but not limited to the following:
- Income and tax documentation
- Employment proof and history
- Low debt-to-income (DTI) ratio
- Good credit score
A hard money lender, on the other hand, is focused on the overall merits of the deal including your borrowing plan and exit strategy.
Marquee Funding Group offers same-day approvals, and closings in as fast as seven to 10 days.
Apply for your second mortgage today
What’s the difference between a traditional lender and a hard money or private money lender?
Private money lenders are individuals, investors, or funding groups, and they have the freedom to fund deals based on their own expertise.
Traditional lenders such as banks have to follow strict lending standards.
Marquee Funding Group is a team of experienced real estate investors and loan originators.
We offer the following flexible loan options to borrowers:
- Loan amounts from $50,000 to $20 million
- Purchase money, rate-and-term refinance, and cash-out refinance
- Owner-occupied or non-owner-occupied consumer or business purpose loans
- Single-family, multi-family, commercial, industrial, construction, and land loans
- Ground up fix-and-flip or fix-and-occupy loans
- Loan-to-value up to 70% (deal specific)
Marquee specializes in the unique or challenging lending scenarios that banks cannot do or refuse to do.
Hard money loans are perfect for “alternative” borrowers such as business owners and investors, as well as typical borrowers who need a fast, flexible lending solution.
If you’re interested in a second mortgage to tap into your property’s equity, submit your loan scenario today for quick review.
We look forward to providing you with a fast, flexible solution for your real estate or personal goals.