3 Key Differences Between A Second Mortgage And A Cash Out Refi Loan

Cash out refinance loans and second mortgages allow you to borrow money while using your home as collateral for the loan. But there are important differences between them to consider when deciding which of the two – if any – is right for you.

Here are three of the biggest differences between a second mortgage and a payout refinancing loan that are worth considering when considering capitalizing on the equity in your home.

1. Refinance loans with disbursement will affect your current loan, while second mortgages will not

When you take out a cash out refinancing loan, you use a portion of the proceeds to pay off your current mortgage. That means your existing There are no home loans. However, with your cash out refinance loan, you are borrowing more than it costs to repay your existing mortgage. This is where the “cash-out” part comes in.

As you refinance your existing loan, your new mortgage has different terms – ideally a lower interest rate too, which makes payments more affordable.

Conversely, if you take out a second mortgage (such as a home loan), nothing will change in your current loan. You keep paying as promised and your new loan is completely separate from your old one.

If your goal is to change your existing loan terms and get some money back at the same time, a second mortgage isn’t going to do it for you. However, if you are happy with your current mortgage and don’t want to change the payment date or interest rate, a second mortgage is a better choice.

2. For refinancing loans with cash-out, you receive one payment instead of two

When you take out a refinance loan with payoff, you have a new loan every month that both replaces your old mortgage and allows you to borrow more.

You don’t have to worry about having to deal with multiple lenders when you opt for a refinance loan with payout. However, there is a chance that your new mortgage payment could be higher than your old one in certain circumstances. It depends on:

  • The interest rate on your new loan compared to your old one
  • Whether you have shortened or extended the withdrawal time
  • The amount of equity that you withdrew

However, if you take out a second mortgage, you will have to keep paying your old loan along with a new loan that also has a monthly payment. Two payments can make paying your bills difficult. Plus, you have a larger monthly obligation as you add a second mortgage payment without changing your existing mortgage costs.

3. Second mortgages often have higher interest rates than cash out refinancing loans

Although a second mortgage is a secured loan that usually offers a lower interest rate than what credit cards or personal loans offer, the primary mortgagee still has the first claim on your home.

This means that the second mortgagee’s claim to the property is not as certain as with just one mortgage on the home. That’s because the primary lender would lose the proceeds from a home sale first if foreclosure were required. Therefore, your mortgage rate on a second mortgage will likely be higher than the rate on your first mortgage – and higher than the rate on a cash-out refi.

When you take out a refi loan with payout, you don’t have this problem. You would have a loan, and that lender would have a prime interest in any foreclosure income on your home if it were necessary. As a result, the interest rate you are offered on a refinance loan with disbursement is likely to be lower than the interest rate on a second mortgage.

Consider these huge differences between disbursed refinance loans and second mortgages if you are interested in capitalizing on the equity in your home. Understanding these factors can help you make the choices that are right for you.


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