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Refinance A Second Mortgage - What You Must Consider

By Edited Nov 13, 2013 0 0

Want to refinance a second mortgage? In order to ensure that you walk away in a better position than you started, there are several things you must carefully consider. After all, there are no sure things in life, let alone the financial industry - and the last thing you'd want is to go through the process of refinancing a second mortgage, only to find out that you're worse off.

Why Refinance A Second Mortgage?

The term "Second Mortgage" is very broad, and is used to define many types of loans. Some people pick up a second mortgage to cover the cost of the down payment (as required by their primary mortgage), others refinance the equity (the difference in value between the home's worth and the remaining mortgage principle).

When most people evaluate their finances, they often look at their primary mortgage, usually because it's much larger than a second (or sometimes even a third) mortgage. In essence, they are selling themselves short, because a second mortgage can be refinanced just like a primary mortgage. After all, a mortgage is merely a type of loan - and you can always take a new loan out to pay off an existing one when the conditions are correct. It's no different than finding a great balance transfer rate on new credit card to replace the clunky interest rate on an existing one.

Besides, second mortgages usually carry higher interest rates than primary mortgages. And by knocking that rate down by a couple points, you could cut your total house payment by hundreds of dollars per month.

What To Consider When Refinancing A Second Mortgage

Any time you refinance, you normally pay an upfront "closing cost." This is effectively a processing charge your bank or mortgage lender adds on top of the mortgage amount. It's important to put this into your calculations, because even if you refinance to a lower monthly payment, you'll still be facing that big, upfront closing cost fee. In most instances, this rings it at several thousand dollars.

Assuming you save $100 per month by refinancing your second mortgage, it could take 50 months before those savings offset a $5,000 closing fee.

Another common financial trap is what's known as "early payoff penalties." Banks stand to make lots of money with mortgages (usually more than three times the loan value) over the term of the loan, and they aren't always happy when people pay them off early, even if they're paying it off with another loan. So what many lenders have done is incorporate a fee to dissuade folks from refinancing or paying the mortgage off before the 30-year term has expired. Be prepared for another multi-thousand dollar charge here, if it applies to your situation. Again, this could mean another couple of years before you see the financial advantages.

Of course, once you have offset these big costs, you will be "in the black" in terms of savings - but also remember that most people refinance every seven years. Which means you might only be coming out ahead for a few months before doing it all over again. Or worse, you might refinance before you ever realize any financial advantages.

Naturally, if you can refinance to a lower monthly payment and find a lender who won't charge closing fees (there are some out there - reputable ones at that) or early payoff penalties, then you'll come out ahead much earlier.

I suppose the moral of the story is to remember that refinancing a mortgage isn't the emergency, cash-saving answer to financial troubles like many people believe. But if you play your cards right, you can make it very lucrative.



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