3/23/2011

Second Mortgage vs. HELOC | Types of Refinance Programs

Second Mortgage vs. HELOC | Types of Refinance Programs - Refinance .com: "The need for more money during these hard economic times has many people wondering where to turn. A lot of people, like my brother-in-law, have decided that it's time to refinance, but what option is best?

My brother-in-law has a mortgage already, so he's wondering if he should take out a second mortgage, get a Home Equity Line of Credit (HELOC), or refinance. While both a second mortgage and a HELOC provide ways to borrow against the equity in your home, there are differences.
A second mortgage refers to a single loan that's placed against the equity that you have in your home. The money is given all at once and can be paid off over a varying number of years. Interest rates for second mortgages are larger than those of the previous mortgage, because in the case of foreclosure, the primary mortgage is paid off first.

Home equity lines of credit allow the borrower more flexibility within their loan. While the funds from second mortgages are given all at once, HELOC's allow for smaller sums to be borrowed as needed and then paid back. This means that interest is not being paid on the maximum amount of money that could be loaned, but only on the money that's being used. Even though interest is only being paid for the money used, the interest rates are generally higher than those of second mortgages and can fluctuate over time.

Why refinancing might be the better option:
With second mortgages having higher interest rates than the first mortgage, when rates drop, refinancing becomes the better choice. You would be able to obtain a new loan agreement at a lower interest rate, instead of taking out a new loan along with the one you already have.

Refinance loans are actually better for the equity in your home. If you take out a second mortgage instead of refinancing, you'll be using more of your homes equity and will be without that to fall back upon in emergency situations.

If refinancing gives you the option of procuring a new loan with a lower interest rate, you'll be able to save money that you didn't have before, without having to pay it off again-as you would with an HELOC or second mortgage. In most cases simply re-evaluating your current loan situation and looking for a refinancing option that allows you to reduce the interest rate, extend the payment time, or reduce your payment will end up being the more advantageous choice."