Home loan refinancing is a great way for homeowners to take advantage of low interest rates or modify the term of their loan but it isn’t the only tool at your disposal.
Take a look at home loan refinancing compared to some of the most popular alternatives below.
Home loan refinancing vs taking out a second mortgage:
While home loan refinancing involves taking out a loan that replaces your existing mortgage, a second mortgage involves taking out a new loan in addition to your current one borrowing against the equity you’ve already put in your home.
A second mortgage is great if you value immediate flexibility, as the closing costs can be thousands less than they would be with home loan refinancing. If you need to do some repairs before selling your property, a second mortgage and a HELOC (Home Equity Line of Credit) can help.
If you are thinking long-term, home loan refinancing is often the better option. With a second mortgage, you are locked into two monthly or bi-weekly payments and carry an increased risk of foreclosure. Home loan refinancing has some upfront costs, but if you get a good rate the long-term risks are lower. The interest rate on a refinanced loan will typically be lower than a second mortgage.
Home loan refinancing vs home loan modification:
A home loan modification appears similar to refinancing but there is one huge difference between the two: home loan refinancing involves paying off your old loan and replacing it with a new one. A loan modification, on the other hand, simply changes the terms of your existing loan. This sounds like a good deal in theory, but loan modifications can negatively impact your credit score. Typically, people modify their mortgage loans when they are struggling to make payments.
If your credit is good and you are not behind on payments, it is almost always better to explore home loan refinancing options. Loan modifications can only be done with your current lender, who usually only agrees when foreclosure is imminent. Home loan refinancing allows you to negotiate terms with any lender you want.
Is home loan refinancing right for you?
If you are current with your payments and have good credit, there’s a good chance home loan refinancing can work for you. At the end of the day, however, the benefits depend on the terms of your existing loan and your specific homeownership situation.