Differences Between Second Mortgages vs. Cash-Out Refinance vs. Home Equity Loans
The Pros and Cons of Taking Out a Second Mortgage, Cash-Out Refinance or Home Equity Loan
When homeowners need access to additional funds, they often turn to one of three common loan options: a second mortgage, cash-out refinance or home equity loan. Each option has its own set of pros and cons, so it’s important to understand the differences before making a decision.
Second Mortgage
A second mortgage is a loan that’s secured by the equity in your home. The loan is in second position behind your first mortgage, which means that if you default on the loan, the lender will only recoup the value of your home after the first mortgage is paid off. Because of this, second mortgages often come with higher interest rates than first mortgages.
Pros:
-Second mortgages typically have lower interest rates than credit cards or personal loans.
-The interest you pay on a second mortgage may be tax deductible.
Cons:
-If you default on the loan, you could lose your home.
-Second mortgages can be difficult to obtain if you have bad credit.
Cash-Out Refinance
A cash-out refinance is a new first mortgage loan that pays off your existing first mortgage and gives you additional cash back. The amount of cash you receive depends on the value of your home and how much equity you have.
Pros:
-Cash-out refinances usually have lower interest rates than second mortgages or home equity loans.
-The interest you pay on a cash-out refinance may be tax deductible.
Cons:
-If you default on the loan, you could lose your home.
-You may have to pay private mortgage insurance (PMI) if you don’t have enough equity in your home.
Home Equity Loan
A home equity loan is a loan that’s secured by the equity in your home. Home equity loans are often referred to as second mortgages because they’re in second position behind your first mortgage.
Pros:
-Home equity loans typically have lower interest rates than credit cards or personal loans.
-The interest you pay on a home equity loan may be tax deductible.
Cons:
-If you default on the loan, you could lose your home.
-Home equity loans can be difficult to obtain if you have bad credit.
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