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We are thinking about either a cash-out-refinancing of our home loan or applying for a second mortgage but don’t really know the difference between the two options. We are going to use the money for bills we are upside down on. We aren’t so far under that we need to file bankruptcy but we are pretty far behind on all of our bills and want to catch up before its to late. We need info about how the two are different and the pros and cons of the options. Please no spam about your mortgage company. We just need the facts. Thank you

3 Thoughts on What is the difference between refinancing a home loan and a second mortgage?
  1. Reply
    Bob @ Movin On
    June 9, 2012 at 2:41 pm

    Well if you are behind on bills that are reported to the credit bureaus it might be difficult to get any type of loan. The likely hood you will get a second at this time is very slim if anything you may qualify for a refinance but I would be careful about telling the bank it to pay the bills you are upside down on. The refinance is going to be based on the value of your home, have you checked that lately? most housing is down 40% from the highs of 2007. Mortgage companies are being very tight with their money these days so do not be surprised if you do not get a loan.
    Good Luck

  2. Reply
    June 9, 2012 at 3:29 pm

    A refinance would refinance your existing loan, while a 2nd mortgage or home equity loan would likely be shorter term at higher interest. However, depending upon current credit rating and outstanding bills, it might be difficult to qualify for a completely new loan, and/or you may have to pay for private mortgage insurance if your primary loan goes over 80% of the value of your home.

    So you need to research how your existing loan with added loan compares with complete refinance that might be at a higher or lower interest rate than your existing loan. But you also need to look at loan terms, since lower monthly payments for a longer time may result in more total interest paid, even if the interest rate is lower. And you need to consider any points paid as effectively part of total interest, since that is part of the cost of borrowing money.

    If or how much cash out you can get depends upon how much equity you have in the property, how much more it is worth than you owe on it, and percentage of total loans to its current value.

    It is not something someone can give you a concrete answer about without many more details.

  3. Reply
    June 9, 2012 at 4:23 pm

    Okay, Both posters before me are correct in some aspects but are off in others. First you have to check your Credit Report and Credit Score before you do anything as far as a loan. The reason for this is because when you ask a bank about loans they want to know your credit score to see what bracket/program is best for you. Now let me get onto the question you primarily asked. Refinancing takes your existing mortgage and reduces your interest rate if you qualify or lets you either expand or lower your monthly payments. Example: Lets say you owe $ 10 for 30 Years Fixed @ 6.25% if you go to a bank you can tell them you want to refinance your existing mortgage and what rate they would offer based on your Credit Score and the amount of money you need to cover your existing mortgage and if you need money out which in this case you do they would add that to your original $ 10. Also they want to know how long you want to take out the refinanced mortgage for either 15 Years, 20 Years, or 30 Years. *Note* the longer the loan the more interest paid over time. I tell people to get a FIXED Mortgage which means the rate can’t increase based on the economy and in other words guarantees your monthly payment will remain the same all the time. Now a Second Mortgage is an extra loan on top of your existing mortgage so if you have a monthly payment on your current mortgage of lets say $ 200 then add the price of a new loan and the combined amounts pays the 2 of them. In my opinion do a refinancing mortgage for a few reasons. 1. It will be easier to get approved if they see that you’re paying off your bills with it which is like a Debt Consolidation and also it lowers your interest rate which currently are the best rates in over 20 years. Now be aware that getting ANY of the loans above is extremely difficult for the reasons below.

    1. Depending on your existing mortgage they will have to appraise your property value to see how much of a loan you are able to apply for. Almost 90% of the time they allow you to take up to 80% of your homes equity so if your house is worth $ 100.00 they will allow you up to $ 80.00 if you have no balance on a mortgage but in this case lets say you owe $ 30 dollars they allow you to take out $ 50.00. Also note that since the economy has taken a big hit home values have declined rapidly. So this may cause some trouble depending on how much you need and currently owe.

    2. Banks now have tighter restrictions on who they can lend money out to. So almost all banks will require either an upfront cost and a Credit Score of at least 650 but now they made it even more difficult if you were ever late on your current loan.

    3. They will request that they payoff your bills. They do this because they fear that you can keep the cash and have 2-5 balances and never pay it back. So if they want to let them pay it off as long as they post the accounts they pay off under your name such as a car payoff. Make sure they have the title under your name and not the bank.

    4. Taxes: Make sure that your property is current with tax payments (Property Tax) because the bank would not like you to have a lean placed on your house especially if you default on the loan. If you were to have a balance tell the bank when you apply that you have to pay back taxes with the loan you want to take out now.

    If you have any other questions feel free to contact me. Good Luck.

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