Is it better to take a private third mortgage or refinance your current loan with cash?

Usually, property owners are confused regarding which way is best to use money from the equity of their home if they already have a second mortgage.  Either they can go for private third mortgage, or they can refinance their loan with cash. This article attempts to explore these two aspects so as to help in rational decision making.

Discussing third mortgage loans

A third mortgage loan can be used by the borrowers to add something of value to their home such as swimming pool, speciality kitchen, gym, etc. With regards to debt consolidation, the third mortgage enables borrowers to pay off the short-term debts and still enjoy lower interest rates. Also, it is very easy to obtain third mortgage loans within a period of 2-5 business days. From the viewpoint of lenders and investors, third mortgage loans are an efficient stream to increase their portfolio and spreading the risks across a number of mortgages. 

However, after taking two mortgage loans, it is very difficult to find lenders who would provide third mortgage loans. Also, the interest rates for third mortgage loans are higher than the first and second loans. The lender also charges a lender fee along with the interest rates and this increases the cost of the borrowers. It also includes broker fees, legal fees and other associated costs which lead to an expansion of the loan amount.

Cash refinancing

Here, an existing mortgage loan is refinanced such that the new loan is a higher amount than the previous loan and the borrowers’ pockets the difference between the two loans as cash. The interest rates will be a bit higher, and the cash out is limited to 80-90 percent of the equity of the property. The total amount of cash that can be withdrawn from this process depends on the lender, the value of the property, the program as a whole along with some other relevant factors. After the refinancing is complete, the new loan will comprise of the original balance before the refinance as well as the desired case out money.

Differences between the two

While third mortgage loan is an added burden to the first loan, the cash out refinances simply a replacement of the first mortgage loan. Also, the interest rates are often lower for cash-out refinance that the third mortgage loan. Closing costs are higher  for refinancing of loans while it is not so high for the third mortgage loans. These closing costs can vary from hundreds to a few thousands of dollars and can thus be a liability for refinancing loans. Cash out loans are much riskier than other loans because they take first position, giving them power to foreclose. The freedom to use the cash, in case of cash out refinance, lies at the disposal of the lenders and as many such restrictions are put on the borrowers as to the usage of the loans. However, such issues do no rise for the latter.

So if the current loan is at a lower interest rate, it does not make sense to refinance the loan at a higher interest rate. Also if someone is already in the middle of a long-term mortgage, then he is advised not to go for cash out refinance.

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