How to choose between a second mortgage vs. refinance

Core Viewpoint - Home equity can be accessed through second mortgages or refinancing existing mortgages, each with distinct features and implications for borrowers [1][7]. Group 1: Second Mortgages - A second mortgage allows homeowners to take out an additional loan on their property, which can be in the form of a home equity loan or a home equity line of credit (HELOC) [2][4]. - Home equity loans provide a lump sum with fixed interest rates, while HELOCs offer a credit line with two phases: a draw period and a repayment period [4][5]. - Typically, at least 20% equity in the home is required to qualify for these products, with interest rates generally higher than primary mortgages due to increased lender risk [3][8]. Group 2: Mortgage Refinancing - Mortgage refinancing involves replacing the original mortgage with a new one, which may offer a different interest rate or repayment term [7][8]. - There are two main types of refinancing: rate-and-term and cash-out, with both requiring approximately 20% equity to qualify [8][9]. - Rate-and-term refinancing is used to lower interest rates or change repayment terms, while cash-out refinancing allows borrowing more than the original mortgage balance for other expenses [8][9]. Group 3: Pros and Cons - Second mortgages can provide quick access to funds but come with the challenge of managing two debts and potentially higher interest rates [10][12]. - Refinancing can simplify debt management by consolidating into one mortgage, but it may involve higher closing costs and the risk of losing favorable original mortgage terms [12][15]. - Financial experts suggest evaluating personal circumstances to determine whether refinancing or a second mortgage is more beneficial, especially considering current interest rates [14][16].