Why Refinance Your Loan Instead of Taking a 2nd Mortgage
Today we’ll explore the options of refinancing a loan as opposed to taking out a 2nd mortgage.
When you are refinancing a mortgage , your are taking out a secured loan that will replace your existing mortgage. As the number of foreclosures increase around the country, it is important to consider all of your options. The big question is why refinance instead of taking out that second loan?
The first consideration is the interest rate. If a home owner has been making payments on an adjustable rate mortgage that has been reset to a higher rate, they may be better off applying for a refinance mortgage. Depending on their credit history, a fixed rate mortgage may be available.
You may be also able to extend the time frame for repayment of a refinance mortgage. By extending the time frame repayment , the borrower can lower their monthly payments. Any money saved can be used to repay the principal amount, by reducing the principal , you can reduce the term of repayment.
advantages and disadvantages of mortgage
In order to do this, it is best to make sure that your loan does not have a pre-payment penalty other wise the refinance costs will certainly outweigh any savings in the long term.
Some borrowers may wish to liquidate some of the equity on their property , possibly to pay off higher interest rate credit cards, car loan or maybe make some home improvements, so if there is equity in the home, a refinance mortgage would be possible.
Since interest rates on an adjustable rate mortgage ( ARM) shift up and down over time, it may be advantageous to lock in a lower fixed rate mortgage. A fixed rate mortgage ( FRM) will ensure that the required payments over the loan term don’t fluctuate.
Some borrowers have opted to what is known as “cash out refinancing”, this refers to the process of refinancing an existing loan to remove the equity. Typically people will do this to pay off high interest non secured debt, such as credit cards for example.
There may be tax advantages to a mortgage over a credit card or a non secured debt, because non secured loans may not be tax deductible depending on your state tax laws, however in many states mortgage interest rates are tax deductible.
A change in deductions may also shift the borrower in a lower tax bracket, however its always important to check with a tax professional or adviser prior to taking any action towards refinancing.
However there are risks involved associated with a cash out or refinance loan. Although you may save money on mortgage payments and taxes, you are putting up your home as collateral for the loan, you can put your house at risk for a foreclosure if are unable to make the payments.
The borrower may also be faced with higher loan fees and points. Points are a percentage of the loan, and can used to lower the interest rates. Typically, if you pay more points, you may qualify for a lower interest rate and lower payments.
A refinance loan should always be weighed against the alternatives, such as either keeping your existing loan, or taking out a 2nd mortgage. If your existing rate is more than 1.5 percentage points higher than the refinance rate, then it may be beneficial to you to refinance.
For more information on refinancing , please refer to all the other many resources available on Loans Online Resource.com.
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