Home refinancing and second mortgages are two ways in which an individual can get some additional funds.
Refinancing lowers monthly payments, saving you money that you can use towards other causes.
A second mortgage is a secured loan against your property.
You are borrowing against the equity in your home.
The following discusses the purposes of both.
Home Refinancing If you find that your monthly payments are too much to handle, then refinancing could be a viable solution.
It could also result in savings if the interest rates have dropped since you took out your mortgage.
If your earnings are significantly more than in previous years, then perhaps you would like to shorten the length of your mortgage, and increase your payments.
This way, you can pay off your mortgage sooner.
Generally speaking, if you can get an interest rate that is at least 2% lower, then it makes sense to refinance.
Anything less than 2% may not be worth doing.
You can extend the term of your mortgage in order to get lower payments.
However, this will result in higher interest rates, and the total amount paid will be more overall.
So this option is only advisable unless it's absolutely necessary.
One of the downsides with home refinancing is the closing costs.
This is why the 2% is the rule of thumb for refinancing, because anything less may not result in much savings at all.
Second Mortgage A second mortgage can really be used for just about any purpose.
One common use is for home renovations.
Many view their home as an asset, and renovations only add value to them.
The result is having even more equity in your home.
With rising tuition rates, some parents will take out a second mortgage to pay for their child's college education.
This option often times is less costly than some of the other alternatives available.
The monthly payments for the mortgage can be spread out over time so it's more easily affordable.
A second mortgage can be beneficial for someone who has a lot of debt to pay off.
The interest rates for many types of debt can be much higher than what you would pay for a second mortgage.
This is especially true for credit card debt.
Over time, you will eliminate debt and save a lot of money.
So how do you know whether to refinance or take out a second mortgage? If you want a lower monthly payment, then refinancing could be the answer.
If you are looking to pay off debt or cover some other expense such as college tuition, then a second mortgage makes sense.
Regardless, always read the fine print and know exactly what you're getting into.