Second mortgage vs. refinance: Your best option

When you need to access your home's equity for a major expense, you have two primary options: taking out a second mortgage or refinancing your existing loan. Both approaches allow you to tap into the value you've built in your home — but they work in fundamentally different ways.

Understanding the differences between a second mortgage versus refinance can help you make an informed decision that aligns with your financial goals. Let’s explore how each option works, its advantages and disadvantages, and how to decide which is the right choice for you.

What is a second mortgage?

A second mortgage is an additional loan or line of credit secured by your home's equity. Just like your primary mortgage, a second mortgage uses your home as collateral. You take it out while keeping your original mortgage intact, which means you have two separate monthly payments and two different lenders to work with. 

Is a second mortgage the same as refinancing? While both options help you access your home’s equity, a second mortgage and refinance work differently. 

Second mortgages typically allow you to borrow up to 80% of your home's current value minus what you still owe on your first mortgage. For example, if your home is worth $400,000 and you owe $200,000 on your primary mortgage, you can borrow up to $160,000 through a second mortgage. But some lenders, like Better, may allow access to up to 90% of your home's equity, depending on your creditworthiness and property type.

In general, interest rates on second mortgages are higher than first mortgage rates because they represent additional risk to lenders. If you default and face foreclosure, you have to pay the first mortgage before the second mortgage from the sale proceeds. 

Types of second mortgages

— Home equity loans: Home equity loans give you a lump sum upfront with a fixed interest rate and fixed monthly payments over a set term, typically 10–30 years.

— Home equity lines of credit (HELOCs): With a home equity line, you get access to a revolving credit line that you can draw from as needed, usually with a variable interest rate and a draw period followed by a repayment period.

Second mortgage pros

— Preserve your current mortgage terms: You keep your existing mortgage’s interest rate and payment structure, which is beneficial if you got favorable terms on the original loan.

— Faster approval process: Second mortgages typically close in 30–45 days, compared to 45–60 days for refinancing.

— Lower closing costs: Since you're not replacing your entire mortgage, you might pay fewer fees, potentially saving thousands of dollars.

— Flexible access to funds: With a HELOC, you can access money only when needed and pay interest only on what you use. This can save you cash in the long run.

Second mortgage cons

— Higher interest rates: Second mortgages typically carry higher rates than first mortgages due to increased lender risk.

— Two monthly payments: You have to manage two separate mortgage payments, which can complicate your budget and increase the risk of missed payments.

— Your home is collateral: Defaulting on either mortgage could result in foreclosure and loss of your home.

— Variable rates with HELOCs: If you choose a HELOC, your payment can increase if interest rates rise during the draw period.

What is a refinance?

Refinancing replaces your existing mortgage with a new loan, potentially with different terms, interest rates, or loan amounts. When you refinance, you pay off the original mortgage and start fresh with new loan terms. This process involves a complete application, underwriting, and closing — just like when you first bought your home.

The key difference between refinance and second mortgage is in how the lender handles your existing loan, but it depends on the type of refinance you pursue. 

A cash-out refinance allows you to borrow more than you currently owe on your home, giving you the difference in cash. For example, if you owe $200,000 on your current mortgage but your home is worth $400,000, you might refinance for $250,000, paying off your original loan and receiving $50,000 in cash.

Rate-and-term refinancing focuses on changing your interest rate or loan term without taking cash out. You might refinance to secure a lower interest rate, switch from an adjustable-rate to a fixed-rate mortgage, or change your loan term to pay off the debt slower and reduce monthly payments.

Types of refinancing

— Cash-out refinance: Replace your current mortgage with a larger loan. Receive the difference in cash while potentially securing better terms.

— Rate-and-term refinance: Modify your existing mortgage's interest rate, loan term, or both without taking additional cash from your home's equity.

Pros of refinancing

— Lower interest rates: Refinancing can reduce your monthly payments and total interest costs if market rates have dropped since your original mortgage.

— Consolidate debt: Some people use a cash-out refinance to consolidate high-interest debt like credit cards, potentially saving money on interest and lowering overall monthly payments.

— Remove private mortgage insurance: Refinancing might eliminate PMI requirements if your home value has increased significantly since its purchase.

— Change loan terms: Switch from an adjustable-rate to a fixed-rate mortgage or adjust your loan term to better suit your financial goals.

Cons of refinancing

— Higher closing costs: Refinancing typically costs 2%–5% of your loan amount in closing costs, which can be substantial.

— Longer approval process: Refinancing usually takes 45–60 days to complete — longer than a second mortgage.

— Restart your mortgage term: Refinancing can extend the time you pay your mortgage unless you choose a shorter term.

— Risk of not qualifying: Changes in your financial situation, credit score, or home value since the original mortgage could affect your eligibility.

Second mortgage vs. refinance 

To help you decide which is better, refinance or second mortgage, here’s a side-by-side comparison of the key differences:

Factor	Second Mortgage	Refinance
Purpose	Access equity while keeping the current mortgage	Replace existing mortgage, potentially with cash out
Closing costs	Lower, typically $2,000–$5,000	Higher, typically 2%–5% of loan amount
Processing time	30–45 days	45–60 days
Monthly payments	Two separate payments	One consolidated payment
Loan terms	Keep existing mortgage terms	New terms that may be better or worse

Not sure which is the best option for you? Better’s pre-approval will lay out all your options in as little as 3 minutes — with no impact to your credit score. You’ll see which loan product suits your needs best based on your current financial situation, the market, and your goals. Get pre-approved today.

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Second mortgage or refinance: Which one should you get?

Is it better to get a second mortgage or refinance? Here’s how to decide which one of these options could be best for you.

When to get a second mortgage

Consider a second mortgage if you have a low interest rate on your current mortgage that you want to preserve. Many homeowners who got mortgages during periods of historically low rates benefit from keeping those favorable terms intact.

You should also consider a second mortgage if you need access to funds quickly. The faster approval process can be crucial when timing matters, like handling emergency expenses or urgent renovations.

If you only need a moderate amount of equity and want to minimize closing costs, a second mortgage offers a more cost-effective solution than refinancing your entire mortgage.

When to refinance

Not everyone wants two separate mortgages. Consider refinancing to simplify your finances with one monthly payment. Cash-out refinancing also makes sense if you need to access a large amount of equity, as the percentage-based costs become more reasonable with larger loan amounts.

Refinancing is also ideal if you want to change other aspects of your loan, like switching from an adjustable-rate to a fixed-rate mortgage, removing PMI, or adjusting your loan term. Additionally, if current interest rates are significantly lower than your existing rate, refinancing can provide substantial long-term savings — even with higher upfront costs.

Explore your options fast with Better

Choosing between a second mortgage and refinancing depends on your current mortgage terms, how much equity you need to access, and your long-term financial goals. 

Second mortgages work well when you want to preserve favorable existing loan terms and need relatively quick access to funds. But refinancing makes more sense when you can significantly improve your mortgage terms or need to access substantial equity.

If you’re tired of the back-and-forth, try Better. Access home equity lines and refinancing solutions designed to help you maximize your equity. Better’s digital-first approach streamlines the second mortgage application process, while experienced loan officers help you understand which option best aligns with your financial situation and goals. Get a personalized pre-approval in 3 minutes.

...in as little as 3 minutes – no credit impact