What's the Difference Between a Cash-Out Refinance, Second Mortgage, and Reverse Mortgage?
If you're a homeowner, you may be wondering if now is the time to refinance your mortgage. Maybe you want to tap into your home equity to finance a home improvement project or pay for college tuition. Or, you might be considering a reverse mortgage as a retirement planning tool.
There are three primary ways to access the equity in your home: cash-out refinance, second mortgage, and reverse mortgage. Which one is right for you depends on your financial goals and circumstances.
Here's a breakdown of each option and what you need to know before you decide.
A cash-out refinance allows you to take out a new mortgage loan for more than you currently owe and pocket the difference in cash. You can use the extra cash to finance home improvements, pay off other debts, or invest in a long-term goal, such as saving for college or retirement.
To be eligible for a cash-out refinance, you'll need to have enough equity in your home to cover the difference between your current mortgage balance and the new loan amount. You'll also need to meet the lending requirements for a new mortgage loan, which can be stricter than those for your original loan.
A second mortgage is a loan that's secured by your home equity, so it's an attractive option for homeowners who have built up equity in their property. Like a cash-out refinance, you can use the money from a second mortgage for any purpose. However, second mortgages typically come with higher interest rates than cash-out refinances or first mortgages, so they're not the best option if you're looking to save money on your monthly payments.
A reverse mortgage is a loan that allows you to tap into your home equity without having to make monthly payments. The money you borrow doesn't have to be repaid until you leave the house or sell it, and there are no income or credit requirements. However, reverse mortgages come with high fees and interest rates, so they're not right for everyone.
Before you decide which type of loan is right for you, it's important to compare your options and understand the pros and cons of each.