Refinance and Second Mortgage

You have a first mortgage (home equity loan) on the property you own, but sometimes you need to take out a mortgage again to access funds.
There are two ways to take out a mortgage: a refinance and a second mortgage. It’s important to understand the differences between refinancing and second mortgages.

➤ What is a mortgage refinance ?
Refinancing is replacing an existing loan with a new one. It allows you to choose a new lender, change the term of your loan, get a new interest rate, or even get a new type of loan.
A refinance can be for the same amount of money or a larger amount, and is often done to get a better mortgage rate and terms. Depending on your personal choice, you can refinance with a new lender or stay with your current lender and refinance.

➤ What is a second mortgage?
A second mortgage is a second loan on your home. You can borrow up to 80% of your home’s appraised value, minus the balance of your first mortgage. While you’re paying off your second mortgage, you must also continue to pay off your first mortgage.

➤ Types of second mortgages
There are two main types of second mortgages: Home Equity Loans and Home Equity Lines of Credit (HELOCs). It’s important to note that with both of these types of second mortgages, you’ll make repayments in addition to your Primary Mortgage Payment.

➤ Second Mortgage and Mortgage Lien
One of the main conditions of a second mortgage is that the lender places a lien on your home when they provide cash or a loan to the borrower. A mortgage lien is a legal claim on a property that allows the lender to foreclose on the property under certain conditions. The lender who owns the borrower’s first mortgage has a first lien on the borrower’s property. The lender of the second mortgage has a secondary lien. Let’s say you default on your home and it goes into foreclosure, the first lender gets their money back first and the second lender gets the rest. This means that the secondary lender takes on more risk on your loan. To offset the risk, the second mortgage has a higher interest rate than the first mortgage. It’s important to make sure you can make both payments.

➤ What is a Home Equity?

Home equity is the amount of your home that you actually own.
Specifically, home equity is the difference between what your home is worth and what you owe your lender. As you pay off your mortgage, the principal (loan balance) is reduced and equity is built.
If you still owe on your mortgage, you only own the percentage of your home that you’ve paid off. The borrower’s mortgage lender owns the rest until the borrower pays off the loan.
For example, let’s say you bought a house worth $200,000 with a 20% down payment of $40,000. In this case, you’ll have $40,000 of equity in your home after closing.
Every time you make a mortgage payment, the loan balance is reduced and more and more equity is built up. When the mortgage is finally 100% paid off, you have 100% equity in your home.

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➤ Home Equity Lines of Credit

A home equity line of credit (HELOC) is a second type of mortgage that acts similar to a credit card, allowing you to access funds on an ongoing basis at a variable rate. During this time, you can spend up to your credit limit, except for the interest that typically accumulates.

You probably already know that you can borrow money using the equity you have in your property, and that you can do this by refinancing or taking out a second mortgage. But most importantly, you need to determine which option is right for you. You need to know exactly what refinancing and second mortgages entail.