Should I Refinance or Get a Second Mortgage?

When you want to tap into the accumulated equity of your home, you have several options before you: a home equity line of credit, a lump sum equity loan, or refinancing your home and renegotiating the terms of your mortgage entirely. Each option serves its purpose, and each comes with its own pros and cons. If you choose to get a home equity line of credit or a home equity loan, this is called a second mortgage. Refinancing is another matter, entirely.

In this article we will explain the differences between second mortgages and refinancing. This information should help you decide which is right for you.

What is a Second Mortgage?

A second mortgage entails that you use your home as collateral to access the equity of your home. This comes in two forms:

1. A home equity line of credit, or HELOC, which allows you to access your home’s equity as needed.
2. A lump sum equity loan, which gives you the amount borrowed all at one time.

Both options are loans that must be repaid, including interest, in tandem with your first mortgage. Taking out a second mortgage can be exceptionally risky, especially since the house itself will be put up as collateral.

What Does it Mean to Refinance?

When you refinance your mortgage with a lender, you get to renegotiate the terms of your mortgage while simultaneously accessing the equity that you have accrued so far. Refinancing allows you to take advantage of lower interest rates – without having to wait for your current mortgage term to expire.

Which Should I Choose?

Ask yourself this: “Am I happy with the current terms of my mortgage?”

If the answer is yes, refinancing is not right for you. Refinancing comes with a series of additional costs, including closing costs and legal fees, that you might not have to deal with if you choose to get a second mortgage instead. Additionally, you might get stuck with higher interest rates to pay if the market has caused interest rates to skyrocket. This could leave you on the hook for thousands of dollars more than you ever intended.

If interest rates have dropped, refinancing can be incredibly smart. Not only do you get to access the equity of your home, but you also get the added benefit of not having to pay toward two separate mortgages. You simply have to pay the one mortgage with the reduced interest rate!

Second mortgages are inherently riskier than refinancing, for two primary reasons:

1. You now must pay toward two mortgages per month.
2. Your home is placed as collateral and can be foreclosed on if you fail to pay.

So, really, whether to get a second mortgage or to refinance depends on how much risk you are willing to accept and how happy you are with the terms of your existing mortgage. Visit https://askross.ca/second-mortgages-toronto-and-gta/ to get more up to date news on private and second mortgages.