Should I Get a Second Mortgage or Refinance?

By Steven Roberts Updated on 7/27/2017

You have options when doing a cash-out refinance to get cash from your current home mortgage or extracting some of the equity through a home equity loan (HEL) or home equity line of credit (HELOC). 

While both options have advantages and disadvantages, you will typically benefit more from one or the other, depending on your circumstances.

Home Refinancing Options

Refinancing a home mortgage carries many benefits for homeowners, including the ability to alter the terms of the mortgage, obtain a lower mortgage rate, reduce monthly payments, and withdraw cash in exchange for home equity. 

Although these loans include closing costs (which can amount to several thousand dollars depending on the size of the loan), home refinances break even on these closing fees within several years.

Cash-Out Refinancing Advantages

Compared with home equity loan options, refinancing has several advantages for homeowners, including:

• Lower mortgage rates
• Less risk involved

One of the main benefits of home refinances is that they allow you to secure lower mortgage rates and reduce your overall monthly mortgage payments. For those homeowners with mortgage rates that greatly exceed those currently available, home refinancing can save a significant amount of money over the lifetime of a mortgage. 

Additionally, since you are extracting equity rather than borrowing against it, home refinances include much less risk than home equity loans and home equity lines of credit.

Who Should Refinance

• Borrowers who intend to remain living in the home for an extended period
• Borrowers who need to obtain a substantial amount of money

Cash-out refinances best suit borrowers who intend to remain living in the property for the long-term. Since refinance loans include closing costs which must be recovered over time, you will find home refinances much more beneficial over longer periods, especially considering their longer amortization schedules, which are typically 30 years. 

Furthermore, borrowers who need to withdraw a large sum of money from their home equity should obtain a refinance loan, rather than a home equity loan, since HEL mortgages often have a higher interest rates with higher amortization periods that would be necessary when taking out sizable sums.

Home Equity Loan Options

Home equity loans and home equity lines of credit can be tremendously beneficial under the right circumstances. These loan products allow borrowers to secure loans against their home equity and can carry exceptionally low-interest rates.

Home Equity Loan and HELOC Advantages

Home equity loan and HELOC advantages include:

• No closing costs
• Better in short-term

While they may include higher interest rates, home equity loans, and home equity lines of credit frequently include minimal home equity closing fees, making them significantly cheaper up-front than refinance loans. 

As such, these loans benefit borrowers in the short-term or those who may choose to sell their homes within the relatively near future.

Who should get an HEL

• Borrowers with low rates on their current mortgage
• Borrowers who need a lump sum for a specific purpose

Home equity loans most benefit borrowers who need to withdraw cash but already have low rates on their current mortgages. Since they would not benefit much from reducing their interest rates, these borrowers would be able to take advantage of the lower rates of shorter-term home equity loans that amortize over 10 to 15 years. 

Moreover, home equity loans suit those who need funds for a specific purpose, such as putting a down payment on a car loan, paying medical bills, or paying student loan debt.

Who should get an HELOC

• Borrowers that need more flexibility
• Borrowers that may need small amounts over an extended period

Home equity lines of credit suit borrowers who need a variable amount of cash over a longer period. With an HELOC, borrowers can withdraw funds as necessary and will only be charged interest on how much is drawn from the line. 

This loan option is less expensive than HEL and refinance loans. However, borrowers should note that HELOC loans include adjustable-rate interest, which makes them riskier and susceptible to increased payments.