Second Mortgage vs Refinance

By Bill Lyons | Published on June 26, 2023

With a second mortgage or refinance, you can tap into your home’s equity to increase your cash flow, pay off debt, or afford large purchases. But which option is right for you?

When comparing a second mortgage vs. refinance, you should consider your goals. With both options, you can leverage your home’s equity. However, with a refinance, you may get lower interest rates that effectively reduce your monthly payments.

So how do you decide between a second mortgage vs. refinance? Keep reading to learn more about both options, when you’d use one instead of the other, and how to decide which option is best for you.

What Is a Second Mortgage?

A second mortgage is a loan on top of your existing mortgage loan that allows you to tap into your home’s equity. However, unlike your first mortgage loan, you can use the funds you borrow for anything, not just purchasing a home. Instead, many take out second mortgages to pay for large purchases, consolidate debt, or invest in home improvements.

With a second mortgage, you’ll repay both your primary and secondary mortgage loans, allowing you to regain equity in your home as you pay your balances down.

Unfortunately, second mortgages don’t allow you to access all of your home equity, with most lenders allowing you to access only around 80% of it. At Griffin Funding, we allow you to access up to 90% of your home equity on primary residences, and up to 80% equity on second homes or investment properties.

You can get a second mortgage that’s a different type from your primary mortgage. For instance, your first mortgage can be a conventional loan, while your second mortgage can be a non-QM loan.

HELOANs vs. HELOCs

There are two types of second mortgages: home equity loans (HELOANs) and home equity lines of credit (HELOCs). Griffin Funding also offers bank statement HELOANs, which provide borrowers with the opportunity to avoid the traditional loan approval process and instead qualify for a HELOAN using their bank statements.

Home equity loans allow you to borrow against your home’s equity and receive the cash in a lump sum, which you’ll then pay back in monthly installments with a fixed rate. But home equity lines of credit act more like credit cards than home loans, giving you continuous access to cash during a draw period.

Besides how the money is received, the most significant difference between a HELOC vs. home equity loan is that a HELOC is the interest rate. HELOC loans have a variable interest rate that adjusts based on market conditions, while HELOAN interest rates are fixed.

However, with a HELOC, you can spend up to your credit limit throughout the draw period and only have to make payments toward interest. Then, you’ll pay back the outstanding balance in installments after the draw period ends, at which point you’ll no longer have access to the funds.

HELOC loans also replenish as you pay them down, acting as a revolving line of credit you can use and reuse at any point during the draw period, typically lasting around five to ten years.

Why Get a Second Mortgage?

The primary reason to get a second mortgage is to access your home’s equity and free up cash flow. The benefits of a second mortgage include the following:

• Flexibility: With a second mortgage, you choose how you receive your money — as a lump sum or revolving line of credit. If you need a lump sum to pay off debt or make home improvements/renovations on your home, you can choose a home equity loan. Meanwhile, if you need a revolving line of credit because you’re unsure of how much money you’ll need or you want to defer payments during a draw period, you can choose a HELOC.
• Competitive interest rates: Second mortgages tend to have lower rates than other types of debt, including credit cards and personal and business loans. The loan is secured with your home, which reduces lender risk, allowing them to offer lower interest rates.
• Potential tax benefits: If you use a second mortgage to pay for home improvements, you may qualify for tax deductions. However, this isn’t always the case, so we recommend speaking with your tax preparer or accountant to ensure you qualify for these benefits.

What Does Refinancing Mean?

The major difference between a second mortgage vs. refinance is that a refinance replaces your home loan with a new one, allowing you to access your home’s equity, change terms, lower your interest rate, or get a new type of mortgage loan.

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Why Refinance?

When comparing a second mortgage vs. refinance, we’re primarily referring to a cash-out refinance since both allow you to access your home’s equity. However, if your goal is actually to reduce your monthly payments, you’ll prefer another type of mortgage refinance loan. The benefits of refinancing your mortgage include the following:

• Changing loan rate and terms: One of the many reasons homeowners refinance their mortgages is to reduce their monthly payments by changing their loan’s interest rate or terms. This can be especially beneficial if you have difficulty paying your monthly mortgage bill.
• A single payment: The biggest difference between a cash-out refinance vs. home equity loan is that you don’t have to worry about two payments to potentially two different lenders when you refinance your mortgage. Instead, you’ll replace your current mortgage with a new one.
• 100% refinancing with VA loans: A VA cash-out refinance may allow you to borrow 100% of your home’s equity.
• Eliminate PMI: If you put down less than 20% on your home loan, you may be required to pay private mortgage insurance (PMI). However, refinancing your mortgage may allow you to remove this additional expense from your monthly mortgage bill.

Refinancing Options

When you refinance your home, you’re not adding a second mortgage to your bills. There are several types of refinancing options, including a cash-out refinance, rate and term refinance, streamline refinance, and so forth.

The type that’s best for you will depend on your ultimate goals. For instance, with a cash-out refinance, the goal is to access your home’s equity by replacing your home loan with one that has a higher amount than what you owe on your mortgage, receiving the difference as a lump sum you can use for anything.

On the other hand, other types of refinancing options, such as a rate and term refinance and streamline refinance, allow you to lower your monthly payments, change the interest rate or terms of your current loan, or get a new loan altogether.

For example, you can switch from an adjustable-rate mortgage to a fixed-rate mortgage or change a 15-year mortgage to a 30-year mortgage to reduce your monthly payments.

If you want to learn more about your refinancing options, contact Griffin Funding. We can help you compare a second mortgage vs. refinance and review your options to find the best solution based on your financial situation and goals.

Second Mortgage vs. Refinance: Which Is Better?

Comparing a second mortgage to a refinance can be challenging because there are several types of each. For instance, you may want to compare a cash-out refinance vs. a home equity loan if you want to access the equity in your home. However, you wouldn’t compare a home equity loan vs. refinance when trying to save money on your monthly payments by reducing your terms since a second mortgage is an extra mortgage on top of your existing one, which means higher monthly payments in total.

So if you want to tap into your home’s equity, you’re really comparing HELOC and home equity loans vs. a cash-out refinance. The best option for you will depend on your wants and needs. For instance, you may prefer a cash-out refinance if you want to avoid taking out another lien on your property. Second mortgages can put you at risk of foreclosure because you’ll be paying two mortgages.

In addition, with a second mortgage, you can’t improve your first mortgage’s terms like you can with a refinance. However, you can refinance a second mortgage. A second mortgage refinance alters you to change the terms and rate of your second mortgage, which can make payments more affordable.

Ultimately, you should refinance if you want to access your home’s equity or change your loan’s rate or terms. Cash-out refinances are best suited for individuals who need to consolidate debt or pay for a large expense.

A second mortgage may be right for you if you don’t want to change your mortgage terms and want a revolving line of credit or a lump sum of cash. A home equity line of credit might be the best option if you don’t know how much money you’ll need. For instance, a HELOC loan may be best for you if you’re making home improvements and aren’t sure of the exact budget.

Second mortgages can also help you pay off debt because they have lower interest rates than credit cards and other loan consolidation solutions.

See Whether a Second Mortgage or Refinance Is Best for You

Second mortgages and cash-out refinance loans allow you to tap into your home’s equity and use it however you like. However, which option is best for you depends on several factors. Second mortgages are typically best for individuals who are happy with their mortgage rates and terms but need to access their home’s equity, while refinances are ideal for when you want to access equity without adding another payment.

Ask yourself what the real interest rate is that you are paying. If you have a first mortgage with a low rate, that’s great. But what if you have other debts? You might think your interest rate is low, but when you average the rates on your debts overall, it may be significantly higher. Credit cards, car loans, business loans, HELOCs and others have all seen their rates drastically increase. The good news is that you probably have a lot of equity in your home that can be used to consolidate all those debts. And while your new mortgage rate might be higher, your blended rate may actually decline. Remember, Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Need to tap into your equity? Contact Griffin Funding today. We can help you decide between a second mortgage vs. refinance to improve your cash flow, pay off debts, make home improvements, pay for large purchases, and shave many years off the remaining balance of your loan.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.