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Second Mortgage Refinancing

A second mortgage is an alternative to personal loans and credit card debt, both of which can have higher interest rates. And while the risk is higher with a second mortgage (you can lose your home if you don’t keep up with payments), a second mortgage could provide more flexibility, such as the ability to refinance.

There are several reasons a borrower may consider refinancing a second mortgage. Homeowners are more likely to take out a second mortgage to use it for things such as:

Home improvement projects: Spending a second mortgage on the right upgrades could improve the value of a home for resale.

Avoiding taking out a personal loan: Some borrowers opt for a second mortgage to avoid a personal loan and save on higher interest rates. A second mortgage could provide extra cash flow. Ben Smith, a loan officer with Deseret First Credit Union in Murray, Utah, noted that a home equity loan may be cheaper than a personal loan, so it could be a good option for homeowners. “Definitely, second mortgages are cheaper, and the interest rate may be tax deductible,” Smith said.

Note: As of Jan 1. 2018, the interest paid on second mortgages is only tax deductible if you use the money to substantially improve your home.

Medical expenses: A medical emergency can be costly. Some borrowers opt to take out a second mortgage to cover medical expenses and avoid credit card or personal loan debt.

Paying for education: Borrowers could take out a second mortgage to cover educational expenses for themselves or their children. Interest rates can be comparable, so borrowers should do some research before risking their home to pay for education expenses.

Avoiding private mortgage insurance: When a buyer wants to purchase a home without the recommended 20% down payment, they may opt for a piggyback loan, which acts as a second mortgage. This allows them to avoid paying a premium for private mortgage insurance.

Borrowers who use the funds for the above reasons may want to refinance their second mortgage to save money. Refinancing a loan could free up some cash every month or allow you to pay off the debt faster. Borrowers may want to consider refinancing their second mortgage under the following conditions:

Improved credit score: If your credit score has increased substantially since you took out your second mortgage, refinancing could lower your interest rate (and your monthly payment.) This could make the payments more affordable and save you money over the life of the loan.

Interest rates have changed: Interest rates fluctuate, and you may find that the numbers are attractive enough to offer substantial savings. For example, if you have a second mortgage for $100,000 at 5.63%, your payment on a 15-year loan would be around $824. If you could refinance the loan to 4%, your monthly payments would drop to $740. Over 12 months, that’s a savings of about $1,000. Remember to factor in the cost of a refinance (there are fees) to determine if the money saved would be equal to or more than the fee.

You want to change loan terms: Refinancing may be a good idea if you want to fold your second mortgage into your first, change from an adjustable rate to a fixed rate or change repayment terms (i.e., from 30 years to 15 years).

You plan to stay put: Refinancing any mortgage (first or second) may not be a smart move if you plan to move out of your home in the next few years. Any savings you gain from the refinance may not equal the amount of the refinance fee.

You want to sell your home: Alternatively, if you want to sell your home, refinancing your second mortgage into your first could make it easier to sell your home. If getting out of the property is more important than saving a few thousand dollars, this may be a helpful option.