It’s the nightmare word for any homeowner – ‘refinance.’ Over the last five years, most homes than ever before have been turned over to lenders, largely due to missed repayments and the after effects of adjustable rate mortgages. Dubbed the biggest housing crisis in history, it’s pushed many would-be homeowners into ‘rental mode,’ and millions of homeowners towards conservative borrowing.
The response is understandable. After seeing so many people lose their homes due to irresponsible borrowing and short-term thinking, it’s understandable that many of today’s homeowners don’t want to push themselves further into debt to keep their homes. There’s been a real move towards financial frugality, both in borrowing and spending, and it may not be such a good thing for homeowners.
Why? Because refinancing your home, making changes to your mortgage, and negotiating what could become a better deal, have all become things that people are afraid of. They’re seen as fast and reckless financial moves, and avoided. But they’re by no means a bad thing – often a second mortgage is a good choice, as is refinancing your mortgage, or taking on additional debt.
In this guide, we’re going to look at the myriad ways in which you can refinance your second home loan – a move that, despite its outward issues, is actually a smart move for many. For homeowners that aren’t afraid of debt, and able to see the bigger financial picture and its benefits, refinancing an already double mortgaged home is a sensible decision, and one that deserves some thought.
The idea that debt should be avoided is particularly popular amongst employees. They have salaries – annual incomes that rarely change, and stay fairly constant. As such, their idea of stability is quite different from that of someone that works on a commission-based salary or operates their own small business. ‘Stability’ for these people is often a smaller long-term commitment to their mortgage.
If you’re a business owner, and one that sees how having greater access to capital can help your own business grow, the decision to refinance your home and take on a second mortgage should be simple and swift. While you’re likely to pay the same amount of interest over the long term, having a lower monthly mortgage commitment will allow you to better invest your money into your own business.
It also allows you to build credit over the long term. Refinancing and other modifications to a home loan are often mistakenly thought of as ‘credit killers’ – decisions that, instead of helping you keep a good credit score over the long term, are thought of as damaging it. This simply isn’t true. When it’s done properly, refinancing your first or second mortgage can actually improve your credit history.
Refinancing, particularly at an economic period such as now, also allows you to potentially lock into lower interest rates than your current home loan. Many homeowners have second mortgages, which are often fixed at a substantially higher interest rate than the current market. By refinancing at this point in time, you could lock into historic market lows, lowering your long-term payments.
Beyond this, there are commitment reasons to refinance your second mortgage. The assumption that young professionals and families will constantly move from one home to another just isn’t true – it’s safe to say that most people wish to stay in their homes for the long term after buying one. By using a refinanced loan to lower your monthly payments, you can commit to a long-term residency.
Refinancing your second mortgage is a process that can vary dramatically from one borrower to another, based on everything from your home’s value to your mortgage’s balance, your credit score to your profession or business. Thankfully, however, banks and smaller lenders are understanding of the needs of today’s homeowners, and know that it’s worth negotiating to avoid a loan default.
Before taking action, it’s important to consider why you invested in a second mortgage in the first place. Many borrowers, rather than spending their second mortgage balance on their home, instead use it to finance other purchases or outside investments. Others, particularly the heavily indebted, choose to use a home equity loan or second mortgage to repay credit card and personal debts.
If this sounds like your situation, it’s essential that you create a plan of action for repaying your own personal debts before refinancing your second mortgage, as a failed repayment plan could assist you in sinking further into debt. While the lower monthly payments of a refinanced loan can help with a credit card bill, they’re a long-term commitment – and one that can result in major long-term costs.
Once this has been established, you could negotiate a better rate on your current mortgage, extend it over a greater period of time, or potentially make other changes to suit your long-term plans. Based on your credit score and past repayment history, your current financial situation, and your assets, it’s possible that you could shave a significant margin off your monthly bill, freeing up your capital.
While potentially risky and certainly a major long-term commitment, second mortgage refinancing is a sound financial move that certainly has its upsides. A personal decision, and one that’s based on situational factors more than anything else, choosing to refinance your mortgage and further extend your loan repayments shouldn’t be glossed over, rushed into, or pursued without thorough research.