Deciding whether you need to refinance your home or opt for a homeowner loan, such as a second mortgage, can be a stressful decision.
Maybe you’re only beginning to weigh your options, but here’s something that may ease your mind. The average homeowner will keep their first mortgage for a mere seven years or less.
After that, most put their home up for sale or refinance, so you’re not alone. Putting your home up to use as collateral for the repayment is considered a homeowner loan.
You already own the home, even if you’re still repaying on your mortgage, but you use the house as security against the loan so you can borrow money like you would a personal loan. This is also known as a secured loan.
A second mortgage would fall into this category because, instead of refinancing the first mortgage, you take out a second one. The reasons for taking out second mortgages vary, but generally include things like remodeling your home, paying off emergency medical bills, investing and consolidating debt.
If the payment schedule and interest rates are better than refinancing your mortgage into a much larger loan, this may be the smarter option.
Even so, a second mortgage is risky. Borrowing against your home at any time can put you at risk of losing the property. Remember, if you default on your payments you could end up losing your home, so do your research and weigh all your options before taking on a second mortgage.
Paying Off Debt
On the other hand, if you are using the funds from a second mortgage to consolidate or pay off debt, it could put you in a better position to make your monthly payments. Every situation will be different. Refinancing requires you to tap into your equity, but it can improve your mortgage interest rates without much effort on your part.
If you purchased your home with an adjustable-rate mortgage (ARM), you probably foresaw the need to refinance rather quickly. The same can be said if you purchased your home at a higher interest rate than the current mortgage rates.
Refinancing Your Home
Refinancing makes sense if you plan on staying in your home long-term. Not only can you convert your ARM to a fixed rate, lower your monthly payments and reduce your interest rate, you may also be able to pay off your mortgage sooner with a shorter-term loan.
Refinancing may not make sense if you’ve already put down roots. Homeowners who have lived in their homes for ten or twenty years are already applying payment to principal and refinancing will only cost more money in interest in the long-term.
Those who have hit a financial bump in the road and had issues with credit scores or even declared bankruptcy should probably leave well enough alone. Poor credit may not allow you to get the best market mortgage rate.If you’ve already squeezed every last drop of cash from your home as possible, such as maxing out lines of credit and home equity loans, it’s not a good idea to refinance.
Chances are, there isn’t enough equity left in your home to make refinancing worthwhile. Determine whether or not you can benefit from either of these loan types by utilizing the moneysupermarket mortgage calculator.