Should you Refinance or Get a Second Mortgage?

One of the most valuable assets homeowners have is their home equity. Home equity is the difference between the current market value of your home and the outstanding balance on your mortgage. It is the portion of a home’s value that you truly own. It accumulates over time as you make mortgage payments, reducing the mortgage principal, and as your property’s value increases due to market appreciation or home improvements.

The two common methods of tapping into your home equity is refinancing and second mortgages.

Refinancing Option

Refinancing involves the replacement of your current mortgage earlier than its maturity with a new one, often pursued to secure more favourable terms, or to tap into your home’s equity.

In today’s market, with higher interest rates, this option is less commonly used, although not entirely dismissed. On one hand, why replace a low fixed rate with a much higher one, or a deeply-discounted variable rate with one that has a smaller discount? And in most cases, pay a penalty to break up your existing mortgage prior to its maturity?

On another, you may be in a situation where refinancing is the only option you have to achieve your financial ends. For example, you may be in need of a different product such as Home Equity Line of Credit (HELOC) or you may want to extend your amortization and lower your mortgage payments – where refinancing, even with attached costs, would make complete financial sense.

Second Mortgage Option

A second mortgage is an additional loan secured against your home, separate from your primary mortgage. Did you ever wonder why it’s called “second mortgage”? Simply because in a timeline perspective, it was registered after the first one, even by a few seconds.

Second mortgages allow homeowners to access funds without affecting their existing and potentially lower-rate primary mortgage. So, if you have a really good rate on your first mortgage and a noticeable time until maturity, hold on to your existing mortgage and access the equity in your home via second mortgage.

A second mortgage can come in a few formats or products. It can be a HELOC where you can access funds on a needs-basis. It will be a separate loan registered against your home. However, as you pay down your first mortgage, the limit of the HELOC will not increase – it will always remain what it was set up originally.

Another common second mortgage is a private mortgage. Private mortgages are usually short-term loans offered by private individuals, a group of investors (syndicated mortgages) or Mortgage Investment Corporations. These mortgages typically serve as a bridge until a better solution is found. They can be used to finance major renovations, to improve one’s credit history by consolidating debt, to finance a short-term investment, etc. They should not be a long-term solution as the interest is typically higher than on standard mortgages.

Whether you’re thinking about refinancing your existing mortgage or considering a second mortgage, consult with a professional. Your bank or a mortgage broker will analyze your circumstances and advise you which avenue to take.

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