There are many thousands of homeowners in America that have more than one mortgage. If you’re one of these homeowners, you may have wondered about refinancing your second mortgage. Can you refinance it, and if you can, should you? As with many financial questions, the answer to your refinancing question may be simple to answer, or it may be a bit more complex. It all depends on your particular financial situation.
First of all, if you have a second mortgage, many lenders will try to get you to combine your mortgages when you refinance. That’s great for them. They get a larger loan on their books that way. It may or not be the right course of action for you, however. It depends upon the terms and balances of both your mortgages weather you should combine your first and second mortgages when refinancing. If your first mortgage has a low rate it may be better to just keep it as it is. If you have an ARM, you may want to combine the first and second when you refinance to avoid interest rate adjustments that you are going through on your first.
If you have accumulated sufficient equity in your home, you can refinance only the second mortgage. You’ll have to find the right lender, however. Usually you can use one of two options. You can either get a home equity line of credit or a home equity loan to pay off the second mortgage. The plus to the HELOC is that you have reserve cash available to not only pay off the second mortgage, but use for other purposes as well. Many have debated the merits of this approach, as some feel that having a large amount of free cash lying about is a temptation to fritter it away on depreciating assets such as cars, boats and vacations. Well, the last one is only an asset in your memories.
What you won’t have to debate however, is that you won’t have to pay interest on any portion of a HELOC until you actually take out the cash. The interest rate is usually higher on a home equity loan than on a HELOC too. As of this writing, a $50,000 HELOC had an interest rate of 1.11% lower than a loan. You can see you can save money two ways here. One, you don’t have to start paying interest on the money until you actually use it, and if you don’t use it all, you don’t have to withdraw it (so there’s no interest charged to that portion). Two, you get the money at a better rate. Your actual interest rate will be based on your credit score, income and other factors. That being said, it’s wise to make sure your credit score is as low as possible before you embark on this venture to help you pay the lowest interest rate .
So, if you are paying a comparatively high rate on your second mortgage, you should examine the possibility of getting a HELOC to refinance it. You could save substantial money if your current interest rate is high enough, and you could use some of the money to improve your property, thereby further increasing its value and your equity. If you pursue this however, make sure you shop around for the best rate. You should also try to negotiate interest rates and the fees you’ll be charged for the HELOC. You could end up in a much better financial position.