Refinance or Second Mortgage?

When it's time to trade-up your first car, you must select a suitable replacement from the many makes, models, and optional upgrades available. Thankfully, choosing your trade-up mortgage won't be as complicated. But there are still some decisions to be made.

Understanding your options

Let's revisit the common refinancing objectives discussed in Chapter 1:

• Lower your monthly payment
• Shorten your pay-off term
• Optimize your loan structure
• Consolidate your debt
• Fund large, one-time expenses

The first three can only be accomplished with a refinance. The last two-consolidating debt and funding one-time expenses-can be accomplished with either a refinance or a second mortgage.

To decide between a refinance and a second mortgage, compare your mortgage interest rate with current market rates. If you're paying more than what's available, a refinance will lower your overall interest costs. If you're paying less, a second mortgage might be the better option. When the two rates are roughly comparable, many borrowers prefer the efficiency of a refinance-one loan, one monthly payment. It's also worth noting that refinance loans generally carry lower interest rates than second mortgages.

You cannot, unfortunately, take your new debt for a test drive before signing up. Therein lies the importance of making informed decisions; refinancing your mortgage every year, after all, can get expensive. That leads us to the next topic: closing costs.