Scenario: I am looking to do some repair work on my home as well as pay off 2 credit cards. I have an existing mortgage on the property, the balance on which is $30,000. I am thinking whether to refinance the mortgage or take out a fixed rate second mortgage loan. My home value is about $100,000 and I want to cash out $20,000. Is it safe to take out a second mortgage or should I refinance and take out extra cash? I need the extra cash for the repairs and also to pay down the credit card debts. And, if you need more details:
I am likely to stay for 10 more years in this property and perhaps even more.
Income tax bracket = 25%
Interest rate on current loan = 8%, interest rate on refinance = 5%, rate offer on second mortgage = 6%
Loan term remaining = 5 years, the loan term for refinance & second mortgage = 10 years.
Possible closing costs on refinance = $1200 and second mortgage = $1000
Monthly payment on my current loan is $608.29
Solution:
If you go for a cash-out refinance, you will be
paying off your existing loan thereby using the remaining cash to carry out the repair work and pay down the credit card debt. This implies that you’ll have to manage only a single loan and that’s quite easier than managing two loans at a time.
Now, considering the current market rates, it will be a good option to go for the cash-out refinance. This is because the market rates on first mortgages are comparatively lower than that on second mortgages. However, you may have to pay higher closing costs if you refinance with a first mortgage loan compared to what you’ll pay if you go for a second mortgage.
Now, if you go for a cash-out refinance, then using the Cash-out Refinance vs Second Mortgage Calculator, your monthly payment will come out to be $543.06. But the second mortgage would require you to pay $233.14 on a monthly basis. Also, the total monthly cost on the refinance for next 10 years will be $65166.65 whereas it will be $64474.68 for the second mortgage.
The cash-out refinance may cost you more on a monthly basis, but it will help you get higher tax benefits on mortgage interest. That is, your tax savings for the refinance will be $3491.66 while for the first and second loans combined, it will be $3368.67. Moreover, the total cost offset on the refinance for next 10 years will be $33491.66, that is higher than the cost offset ($33368.67) on the combined loan (first and second loans). However, the net cost offset on the former for the next 10 years will come out to be $31674.99. But for the combined loan, it would be somewhere around $52106.01. Now, the total savings, if you refinance, will be $ 20431.02 for the next 10 years. On the other hand, you will not be able to save any cash amount on the combined debt including the first and second mortgages. Thus, in your case, I believe going for the cash-out refinance will be a better option.
If you have any query on cash out refinance and second mortgages, feel free to Ask Questions and Discuss with the community.
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