What’s the Best Way to Use Your Home Equity? Get a Second Mortgage, a Cash-Out Refinance, or a Reverse Mortgage?
When it comes to figuring out the best way to use your home equity, you have three main options: get a second mortgage, a cash-out refinance, or a reverse mortgage. Let’s take a closer look at each one to help you decide which one is right for you.
Considerations Regarding a Second Mortgage
A second mortgage is a loan that’s taken out on top of your first mortgage. The main advantage of a second mortgage is that it usually comes with a lower interest rate than other types of loans, such as credit cards or personal loans.
That said, there are a few things to keep in mind before you take out a second mortgage:
• If you have a fixed-rate first mortgage, you may want to consider taking out a home equity loan instead of a second mortgage. That’s because with a home equity loan, you can still take advantage of the lower interest rate on your first mortgage while getting a lump sum of cash.
• If you have an adjustable-rate first mortgage, a second mortgage could help you lock in a lower interest rate on part of your debt.
• Keep in mind that if you take out a second mortgage, you’ll have two monthly payments to make instead of just one. And if you have trouble making your mortgage payments, the lender could foreclose on your home.
Considerations Regarding a Cash-Out Refinance
A cash-out refinance is when you take out a new loan to replace your existing mortgage and then use the extra cash to pay off other debts or make home improvements.
There are a few things to keep in mind before you do a cash-out refinance:
• If you have a fixed-rate mortgage, you may be able to get a lower interest rate by doing a cash-out refinance.
• If you have an adjustable-rate mortgage, you may want to think twice before doing a cash-out refinance. That’s because you could end up with a higher interest rate than you have now.
• When you do a cash-out refinance, you’re essentially taking out a new mortgage. That means you’ll have to go through the entire mortgage process again, including getting a new appraisal and closing on the loan.
• Keep in mind that if you have trouble making your mortgage payments, the lender could foreclose on your home.
Considerations Regarding a Reverse Mortgage
A reverse mortgage is a type of loan that allows homeowners who are 62 or older to tap into their home equity without having to make monthly mortgage payments.
There are a few things to keep in mind before you take out a reverse mortgage:
• A reverse mortgage can give you a lot of money, but it’s not necessarily a good idea to use it all at once. That’s because if you spend the money too quickly, you could end up running out of money later on down the road.
• If you take out a reverse mortgage, you’ll still be responsible for paying property taxes and insurance. And if you don’t pay those bills, the lender could foreclose on your home.
• When you take out a reverse mortgage, you’re essentially taking out a loan against your home. That means that if you sell your home, you’ll have to pay back the loan. And if you don’t have enough money to pay back the loan, the lender could foreclose on your home.