Every time you make a mortgage payment, you gain equity in your house. The difference between the property value and the amount you owe to the Florida Mortgage Company will be your home equity. This equity can be used to borrow money. However, a common question most people have is – “Is it better to have a second mortgage or a refinance?” Determining an option that will be the best for you can be tricky. Hence, we have created this guide for you that will enlist all the pros and cons associated with the second mortgage and refinance. Keep reading till the end!
What do you mean by a second mortgage?
When you get a second mortgage from Florida Mortgage Lenders you are borrowing against the equity in your house. Here’s an interesting article from Daily Prosper that you could benefit from credit repair before buying a home!
What are the different types of second mortgages?
There are generally two kinds of second mortgages available with Florida Mortgage Lending. One of them is the Home Equity Line of Credit, also known as HELOC and the second one is the Home Equity Loan.
Home Equity Loan – When we talk about this loan, the money is borrowed against the home equity and you will receive a lump sum amount. You can then pay back this loan in monthly installment along with a fixed interest rate.
Home Equity Line of Credit – This is another kind of second mortgage available with Florida Home Loans wherein you can get continual access to your equity at a certain variable rate. When you take out the home equity line of credit, a draw period starts. During this draw period, you are allowed to spend up to the credit limit and pay only the interest that is accumulated. After the draw period, you can pay back the remaining balance in monthly installments.
How does a second mortgage work?
Along with the monthly payments for the primary Florida mortgage loans, you will be making payments on the second mortgage. If you have the primary and secondary mortgage from two different companies, you will have to pay each lender separately. As and when you keep paying for both the loans, you will gain the equity of your home again. However, it is important to know that you will not be able to access all of the home equity if you choose a second mortgage. The amount of equity you will have to leave totally depends on factors like the current debt, credit score, and the lender.
Second Mortgage Loans – Pros and Cons
Pros
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Keeping the current loan terms
If the primary mortgage has a huge interest rate, you can keep the same rate with the second mortgage. The second mortgage will not replace the existing loan. Instead of the changes in the current loan terms, the second mortgage will add on extra payment on the monthly expenses.
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Deciding how you will get the money
It is up to you to select whether you want a home equity loan or the HELOC. If you want a lump sum amount, a home equity loan will be the option you should go for. However, if you wish to borrow money for a home renovation or another ongoing project and you do not know how much money you will need, then HELOC is the option for you.
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Paying fewer closing costs
With a second mortgage, home equity usually covers all of the closing costs. because you will not have to pay the closing costs, high chances you will be saving thousands of dollars.
Cons
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Being stuck with the original mortgage terms
When you get a second mortgage, it does not have an impact on the original mortgage. With the second mortgage, you will not be able to change the interest rates or terms of your primary mortgage.
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Added monthly payment
Apart from paying the primary mortgage every month, you will also have to pay for the second mortgage. And if you miss a payment, you may miss your home.
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Another lien on your home
Having another lien on the home can put you at an added risk of foreclosure if you do not pay your lenders consistently.
What Is Refinancing?
When you replace your primary loan with a new loan, it is known as refinancing. When you refinance you have the liberty to choose a new lender, change the loan terms and opt for new interest rates or even choose a different type of loan with Mortgage Refinance Florida.
What are the different types of Refinances?
The two common types of refinances are rate and term refinance and cash-out refinance.
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Rate and Term Refinance
With this type of refinancing, you can adjust how your mortgage is set up without impacting the principal balance. If you wish to lower your monthly payments, you are free to choose for a longer-term. If you want to save on the interest and own the house faster, you can go for a shorter term. You can also refinance to a lower rate if the market rates get lower than the time you borrowed the mortgage.
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Cash-out Refinance
This type of refinancing lets you access your equity in exchange for a higher principal. Let’s say that you have a mortgage with $120,000 as the principal balance. Now, the repairs you want to do for the house cost $30,000. You will then accept the loan worth $150,000. After you close, you will be receiving $30,000 in cash.
How does refinancing work?
The application process for refinancing is similar to that of the original mortgage application. Firstly, you will have to submit your final list of documents to the Florida Mortgage Lenders and then they will underwrite your loan. In some cases, before you refinance, you may need an appraisal. With the refinance, you can pay some of the similar items as during your original mortgages like a home title search, an appraisal, or application fees.
Once the underwriting and appraisals are done, the next step will include the closing and signing of the new loan. If you obtain the cash out refinance, you will receive the money a few days after closing on the loan. However, with a second mortgage, you will not be able to access all of the home’s equity when you choose to refinance.
Refinancing – Pros and Cons
Pros
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Single monthly mortgage payment
Perhaps, the biggest advantage of refinancing is that you will be replacing your current mortgage loan with a new one. Hence you will only have to worry about a single payment each month.
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Change the existing loan terms and rates
With a mortgage refinance, you can change the rate and term of the loan. This can come in handy if you have trouble with the monthly mortgage repayments. You may not get this option if you opt for a second mortgage.
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Lower the interest rates
One lien on your property will mean lesser risk for the lender. It also means that lower interest rates are possible when you opt for cash-out refinancing as compared to a second mortgage.
Cons
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Higher closing costs
Since you will be responsible for covering all the closing costs when you will be refinancing, they can range up to 2 to 3% of the loan’s total value. While it may be possible to roll on the closing costs, this option will increase your monthly payment.
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Forfeit the current interest rates
The lender may ask you to accept the interest rate that is closer to the current rates going on in the market. if the rates are higher, you may lose the money or if you lock the loan with lower interest rates.
The bottom line
Whether you choose to opt for a second mortgage or a refinance, it is important to learn the difference between the two. This way, you will be in a better place to decide. While both have their own pros and cons, you can choose one based on your current situation.
No matter what option you choose, Florida Mortgage Company is here to assist you. Give them a call today to know more about their services.
