What Is the Difference Between Refinancing and a Second

By Natasha Ondzes, eHow Contributor

Mortgages can be very confusing. The many options available can seem overwhelming. The difference between a second mortgage and refinancing is fundamentally a difference of rates and fees. When you refinance, you replace your existing loan with a new one. When you get a second mortgage, you take an additional loan out with either the same lender who holds your first, or primary loan, or another lender. Both loans are guaranteed or backed by your property. There are a variety of loan types within each category of loan.

1. • The equity of your home's value is the difference between what the bank determines your home is worth (through an appraisal) and what you owe on you primary or first loan.

   • The purpose of a second mortgage is to get cash. The cash you receive from the loan is based on the equity you have in your home. A second mortgage does not change the terms (rate, payment or duration) of your first mortgage. The purpose of refinancing can also be to get cash. However, in the case of refinancing you pay off the first mortgage and take out a new loan with new terms. Refinancing can also be used to lower interest rates with or without getting cash.

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• Refinancing can accomplish three things: receive cash, lower interest rates or both. In some cases, you can lower your interest rate, get cash out and lower your monthly payment all at the same time.

• Because refinancing is getting a new loan on your existing property, all the traditional mortgage types are available to you. They include fixed-rate, adjustable rate, balloon and reverse mortgages.

• There are two types of second mortgages. A home equity line of credit (HELOC) and home equity loan are different in the way you receive and pay back the loan. A line of credit is similar to a credit card; however, the rates are considerably lower and your house is the security behind the loan. You can withdraw cash from the line of credit as needed and pay it back over time with only minimal interest payments due each month. A home equity loan gives you a lump-sum payment and then payments are based on interest and principal over a fixed time period, often five to 10 years.

• Refinancing can have considerable fees or closing costs associated with the new loan. Home equity loans or lines of credit often have low or no fees associated with them. This can impact the decision to refinance or take out a second mortgage. The time that you intend to stay in your house can determine if it is more beneficial to refinance or take a second mortgage, as well as the current interest rates compared to your primary loan rate.