2nd Mortgage versus Cash-Out Refinance

Many borrowers who have an existing mortgage with a balance far lower than the value of their property face a tough decision when they are looking to get extra cash from their equity. They must decide whether to take on a 2nd mortgage to get the money or to refinance their first mortgage for more than the current balance, also known as a cash-out refinance.

Generally, if rates are higher now than when you got your original mortgage, the 2nd mortgage will probably make more sense for you. Conversely, if rates are now lower, the refinance might be a better option. While this rule of thumb is useful, there are several other factors you’ll want to consider when making your decision. They are:

• The interest rate and points available on both the refinance and the 2nd mortgage
• Mortgage insurance requirements for the new first mortgage
• Mortgage insurance, interest rate, and period remaining on your current first mortgage
• The term of your new first mortgage compared to the term you would select on your new 2nd mortgage
• The amount of money you need from the transaction
• Your current income tax bracket
• The length of time you plan to remain in your home
• The rate of return you earn on savings or other investments

These factors, taken together, can help determine whether a cash-out refinance or a 2nd mortgage would be the best solution for your situation. Because the calculation taking all these factors into account is complex, you may want to seek out an online calculator to do the math for you.

If you have all this information at hand, you should be able to make an informed decision about the best way to get extra cash from your home.