When shopping for a mortgage lender, it is important to know which loan product would best fit your borrowing needs. Here are tips to help you weigh refinance vs second mortgage and how your choice can make a difference in your finances.

Situation A: Refinance

You can refinance your existing mortgage and take cash out.

If you home has an appraised value of $300,000 and you still have an outstanding balance of $200,000, it means your equity is only $100,000. You can refinance your loan and take out $100,000 to pay for your urgent expenses. Your new loan is now $300,000.

Situation B: Second mortgage

Second mortgage simply means you are taking a home equity loan, on top of the first mortgage.

It works in the same way as refinancing, except in second mortgage you have two loans: $200,000 and a second mortgage of $100,000. There are two loans you need to make payment on.

Should I get a second mortgage or simply refinance to consolidate debts?

The two options can help you manage your debts wisely. Refinance debt consolidation loan helps you refinance your existing home loan and borrow an amount which is equivalent to your home equity. In the given example above, you can borrow $100,000 and use it to repay your creditors.

A second mortgage works the same way. You can borrow your home equity worth $100,000 and use it to pay your creditors. The only difference between the two is that in refinance, you have a brand new loan worth $300,000; while in second mortgage, you get another loan on top of your first mortgage.

I don’t have an impressive credit rating. How can I find the best refinance and second mortgage loan products?

Here are some practical tips for finding good mortgage loan products, especially if you have bad credit:

  1. Compare loan products. Use the internet to make soft enquiry (those which will not be recorded by online lenders as hard enquiry). It will help you sort out which lender qualifies you for the loan or not. It is also important to learn as much as you can about the maximum amount you can borrow, the interest rates and the fees associated with the loan.
  2. Get a loan type that applies to your financial situation. Not all loans are created equal, simply because people have changing needs. You can apply for the adjustable rate mortgage if you are confident that the market is doing well, and the cash rate will not go up anytime soon. It will help you save money on interests. But, if you are not sure about your finances, and your ability to cope with difficult financial situation, you can opt for the fixed rate mortgage so you can prepare for your fixed monthly repayments.
  3. Read the terms of the loan to avoid surprises that could lead to higher penalties. Take time to understand the loan terms and ask the loan officer about important stipulations such as pre-payment penalties, and relevant issues.
  4. Create a spending plan to ensure that your money is heading somewhere constructive. It is so easy to be carried away by lenders promising very high amount of loan, despite low equity. The truth is that lenders would only give you a loan which will not put them at very high risk of not being paid. If they take the risk, they may offset it with high interests that can go up to 200% or 300% of your loan amount. By creating a spending plan—you will have a realistic expectation not only on the amount of loan you can get, but where you will use it. That realization will protect you from being swayed by faulty advertisements from loan sharks.

Home refinancing or second mortgages are two of the most critical financial decisions you can make. The long-term nature of the loan means that you will be stuck in that contract for 15 years or more. So, wrong financial move can either put you at the brink of bankruptcy or take your home away from you. But, if you choose wisely, you can save on interest rates, which means lower monthly payments and more savings. Choose the best loan option that suits your financial situation. Beware of loan sharks promising quick and substantial home loan options irrespective of your home equity and credit score. Try to understand the different terms and interest rates by asking for free quotes and interest calculations, not only to know the price of the loan, but the legitimacy of the lender.

Refiance vs second mortage, which option wins? Naturally, it’s the one that helps you put your money to some constructive use. If you are taking out a loan to payback existing loans, then pay them all. If you are using the money to grow your wealth, make smart decisions so you can grow your money in no time. Contact NSW Mortgage Corp, we are happy to answer any questions.