What's the Difference Between a Cash-Out Refinance and a Second Mortgage?
When it comes to tapping into your home equity, you might be wondering what your options are. Two of the most common ways to do this are through a cash-out refinance or a second mortgage. But what's the difference between these two types of loans, and which one is right for you?
A cash-out refinance is basically a new mortgage that replaces your current one and gives you extra cash to use however you want. Meanwhile, a second mortgage is a loan that's taken out in addition to your first mortgage and is secured by your home equity.
So, which should you choose? Here are a few things to consider:
Cash-out refinance vs. second mortgage:
With a cash-out refinance, you're getting a new mortgage to replace your existing one. This means you'll have to go through the entire loan process again, including getting approved, closing costs, and so on.
With a second mortgage, you're simply adding on to your existing mortgage. This can be a quicker and easier process since you've already been through it once.
Cash-out refinance rates are usually lower than second mortgage rates since you're effectively taking out a new first mortgage.
But keep in mind that second mortgage rates can be lower than cash-out refinance rates if your first mortgage has a low interest rate. This is because the second mortgage piggybacks off of the first and usually has a slightly higher interest rate.
With a cash-out refinance, you can generally choose any loan term you want since it's a new mortgage. This means you could get a shorter term and save on interest, or go for a longer term to make your monthly payments more manageable.
With a second mortgage, the loan term is often determined by the remaining term of your first mortgage. So if you have 20 years left on your first mortgage, your second mortgage will likely have the same term.
If you itemize your taxes, you may be able to deduct the interest on both a cash-out refinance and a second mortgage. But keep in mind that the new tax laws that went into effect in 2018 limit the amount of interest that can be deducted to $750,000 for loans taken out after December 15, 2017.
So, what's the bottom line? Both a cash-out refinance and a second mortgage can give you access to your home equity and have their own pros and cons. It's important to compare your options and understand the implications before making a decision.