Refinancing vs. Second Mortgage: What Are the Differences?

The high price of houses in Utah has led some homeowners to think about whether it’s an excellent time to take advantage of the higher equity on their properties.

A second mortgage is usually a better option when home prices are surging, but planning to refinance an existing one has its advantages. For instance, you should consider applying for a new loan to pay off your current one when interest rates for refinancing in Provo, Utah are lower with a shorter payable period and when it involves little to no closing costs.

Choosing the Right Financing Type

Both second mortgages and refinancing can have a significant impact on your credit score, but the former arguably affects your finances because of the additional debt. Homeowners can take out another mortgage to pay for a significant home renovation, pay off school tuition, or consolidate debt. You can also do this when you refinance a mortgage, but the only difference involves paying only a single type of loan.

If you can get a second mortgage like a home equity line of credit (HELOC) with a five-year repayment period, then it’s a better choice than refinancing. This is particularly true if you already paid half of your current mortgage. Remember that refinancing will clear your old debt and then take on a new one, which means that you will start paying monthly installments for another 15 or 30 years.

On the other hand, a five-year HELOC lets you repeatedly draw funds against a maximum limit. It’s quite similar to a credit card with a variable rate and a revolving balance. But just because that it has a shorter repayment doesn’t mean that it has no severe consequences in case of default.

Consequences of Default

reverse mortgage

Your mortgage lender can foreclose your home when you fall behind your payments on a second mortgage. Their decision relies on the current value of your house. Even if they don’t pursue a foreclosure, a second mortgage lender can still file a lawsuit against you. Once a judge rules in favor of them, you might pay the defaulted amount plus any other applicable fees through wage garnishment or emptying your bank account in compliance with the court order.

If you refinance your current mortgage after taking out a HELOC from a different lender, a subordination agreement will be necessary. The agreement lets the first mortgage lender be the priority when it comes to payment in case of default.

You can apply for bankruptcy to reduce what you owe to the second mortgage lender, or remove it entirely. Take note that if you file for a Chapter 13 bankruptcy, your secured and unsecured debt shouldn’t reach more than $1,257,850 and $419,275 respectively.

In the end, remember that additional lines of credit affect your financial risk whether it’s a second mortgage or a refinancing. You should ask a professional for advice before making any decisions. Once you choose between the two, pick a mortgage lender in Utah that can offer a variable rate.