Home Loans Compared: First Mortgage Vs. Second Mortgage

[Aug 22, 2010.]

 

Something has come up and you need cash for a home improvement, college tuition, medical bills, a new car, debt consolidation, or a business opportunity. You want to access the equity in your home to raise the required cash. When does it make sense to refinance a first mortgage and pull out cash, rather than add a second mortgage, such as a home equity loan or a home equity line of credit. What you're really asking is, "Which is cheaper?" You will need this information to answer that question.

How long will it take you to pay back the money?

The more money you borrow, the longer it is likely to take you to pay it back. If you only need $10,000 for a new roof, and you think you can pay that back in a few years, a home equity line of credit may pencil-out best. If your son just got into Harvard, you may need $100,000 and a much longer time to pay it back. In this second case, a new first might work best.

Apply for a home equity loan now.

How many monthly payments have you already made on your current first mortgage?

With an amortized mortgage, you pay the bulk of the interest in the beginning of the term. The percentage of the payment that goes toward the principal increases every month. If you have been paying on your first mortgage for more than 10 years, it may not make sense to refinance and start over with the interest payments. Adding a second would make better financial sense.

What are the closing costs on a new first mortgage vs. a new second mortgage?

Closing costs on a first mortgage are usually much higher than closing costs for a new second mortgage. If you think you can pay back the money you need quickly, paying a lot in closing costs wouldn't make much sense. Home equity loans and home equity lines of credit are usually cheap loans up front.

Can you improve the interest rate on your first mortgage?

Maybe you have had your first mortgage for a long time, and made a lot of payments, but interest rates have improved significantly since you got your loan. If you can improve your interest rate enough on the first mortgage to make a refinance worthwhile, consider a new first mortgage with a shorter term. The shorter the term, the less interest you will pay. If the interest rate is also lower, it might make sense to refinance the first to get your cash.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.