Cash-Out Refinance or Second Mortgage?

For today's homeowner, tapping home equity isn't a problem. There are legions of lenders who would be more than happy to cut you a check. The tricky part can be determining which type of loan is right for you.

Two popular types of mortgages that deliver cash are the second mortgage and the cash-out refinance loan. There is no set rule on which one is better for a borrower. Therefore, base your decision on which loan best suits your personal needs. Here are a few things to keep in mind.

Deciphering home mortgage options

• How quickly do you need the money? Your typical cash-out refinance can take a while to close. Many require an appraisal, underwriting, and title searches. Most second mortgages don't require as much processing, which makes them a more attractive option if you need the money ASAP.
• How much are you willing to spend? Some people believe that a cash-out refinance to replace a first mortgage is more attractive because they tend to have lower interest rates. However, take into account the fees required to close a loan. Many second mortgages can be closed without a fee, while a cash-out refinance can include substantial closing costs.
• How attached are you to your current home mortgage rate? As mentioned above, people opt for a cash-out refinance because it tends to carry a lower rate. However, if your current first mortgage is already at a good rate, you may not want to refinance if rates are higher. In this case, choosing a second mortgage, and committing to an aggressive repayment plan, might make more sense over the long haul.
• What is the right term for you? Most cash-out mortgage refinancings carry a 15- or 30-year term. Second mortgages, however, are more flexible and can have much shorter terms. This can save you quite a bit of interest in the long run.
• Are you in a cash crunch? If you are, consider that a home equity line of credit allows you to make interest-only payments on your loan. It's not a good maneuver over the long term, but it may help you shrink monthly payments so that you can get through a short-term cash crunch.

There are a variety of factors that play into your decision to choose between a cash-out refinancing and a second-mortgage. To help your decision-making process, prioritize your short and long-term goals. This will help you answer the questions listed above and ultimately choose the mortgage that makes dollars and sense for you.