Mortgage refinance is not always possible if there is a second mortgage on the home. In fact, many people get confused by the two terms: refinancing a mortgage and taking a second mortgage. They are quite different, and sometimes one or the other is the wisest step to take. We shall first discuss the difference and then focus on refinancing.
Please note: As markets change, the availability of second mortgages and lines of credit can come and go and you may or may not find second loans readily available based on market conditions and or your specific circumstances.
Second Mortgage, Equity Line of Credit and Refinance
A second mortgage is fundamentally a loan using the equity on your home as collateral. It generally comes in the form of a fixed loan. A specific sum of cash is paid on closing, and repaid over an agreed period. In other words, a second mortgage. People generally choose this type of finance when they require the money for a specific purpose, such as installing a pool, conservatory or new kitchen – or even to buy a new car.
Another option is an equity line of credit. This is a revolving loan whereby the homeowner is provided with a maximum level of debt, based again on the equity of the home. This is preferred where the borrower prefers to repay the loan sporadically. The credit is always available without the loan having to be renegotiated once it has been repaid.
Refinancing a Mortgage
Mortgage refinance is where the first mortgage is refinanced with improved equity taken into account. A second mortgage can also be refinanced. However, refinancing of just the first mortgage is not possible if there is second lien on the home. It is sometimes possible, however, to refinance the two mortgage loans together into one.
There are times when people prefer the second mortgage or line of credit. This makes sense if the real estate has significantly appreciated in value. However, you should get full details of the interest rates and costs concerned to establish whether it is worthwhile doing. With just one loan to repay, you might feel a bit easier. Failure to pay either a first or a second mortgage could result in foreclosure.
Is Mortgage Refinance Appropriate?
Some say that if the refinance costs are less than 3% of the loan balance then it should pay to do so. Much depends on how long you then live in the property, but if you intend staying for at least 3-5 years, then refinancing would likely be worthwhile. However, the costs are important as well as the new interest rate.
In addition to the above, if your new interest rate is going to be 2 percentage points lower than your current rate, then mortgage refinance should be considered. Many people have purchased their homes when mortgage rates were higher than they are now. Refinancing could be an intelligent move. This could enable them to either pay less each month or reduce the term of the mortgage.
Mortgage refinance might look good on paper. However, the combination of interest rates, repayment arrangements and costs can be complex. Like any other form of mortgage transaction, take professional mortgage advice before committing yourself to refinancing a mortgage. In fact, we’ll be more than happy to answer any questions you might have, free of charge. Feel free to contact us directly or request a rate quote using the fast quote form above.