Mortgage refinancing is similar to second mortgages or equity home loan refinancing. For starters, in both cases the borrower would have already availed some mortgage loan, and paid some equated monthly installments against it. There is some principal component in each such EMI, which reduces the amount borrowed by the person. Effectively, that amount of equity gets rebuilt. Borrower can choose to withdraw this equity by opting for mortgage refinancing or second mortgage. At times, such equity is built due to increase in property prices. In case of mortgage refinancing, the borrower is at liberty to approach lenders other than existing lenders. Therefore, the borrower could get a better bargain outside in the market. In other words, the borrower could get more loan amount on lower interest rates, which may be repayable over a longer term.
However, there is a trade off. The existing lender would penalize the borrower for closing the loan ahead of the timeline. At the other end, the new lender would be collecting some monies for administration, and processing of mortgage refinance. Therefore, borrower would need to weigh such factors before opting for either of the two. Second mortgages are not availed for reducing interest rates. Any advantage of reduced interest rates is only accidental, and valid only on fresh amount of equity that is withdrawn. Unlike them, mortgage refinancing is often used to bring down interest rates. Second mortgages are often repayable within the same time frame as original mortgage. This means if the original mortgage term was 15 years, and after five years, borrower opts for second mortgage, he or she would have to repay the additional amount within the balance 10 years. Unlike this, the borrower can get a fresh term of 15 or 20 years to repay the entire loan if he opts for mortgage refinancing. This difference affects the equated monthly installment. Since the amounts borrowed under second mortgages have to be repaid in shorter term, the EMIs would be higher. The borrower should review his or her financial position to check whether this EMI can be accommodated in the monthly budget.