Key Takeaways
- Your current mortgage rate should drive the decision, since a second mortgage preserves a low rate while a cash-out refinance replaces it entirely.
- Second mortgages have lower upfront costs but higher interest rates, and they add a second monthly payment.
- Cash-out refinances offer one payment but often increase total costs with higher fees and a new loan term.
You’ve built up equity in your home and want to put it to work. Deciding between adding a second mortgage or replacing your entire loan with a cash-out refinance can mean thousands of dollars difference over time. To help make your choice, let’s walk through how each option works, compare costs side by side, and highlight scenarios where one option is more advantageous.
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What is a second mortgage?
A second mortgage is an additional loan secured by your home that you take out while keeping your original mortgage in place. The term “second” refers to its position in the lien hierarchy. If you were to default, your first mortgage lender gets paid before the second mortgage lender sees a dime. That subordinate position increases the lender’s risk, so second mortgages carry higher interest rates than first mortgages. The trade-off is that you can access your home’s equity without touching your primary loan. Most homeowners consider two main types of second mortgages.
Explore your home equity options. Start todayHome equity loan
A home equity loan gives you a lump sum of cash with a fixed interest rate and fixed monthly payments. You’ll know exactly what you owe each month for the life of the loan, which typically runs 5 to 30 years. They’re suitable when you know exactly how much you need upfront, such as for a kitchen renovation with a firm contractor bid or consolidating a set amount of credit card debt.
Home equity line of credit (HELOC)
A HELOC is like a credit card secured by your home. You get a credit limit and borrow as needed during a draw period, usually 10 years. You often pay interest only on what you borrow. After the draw period ends, you enter a repayment period, typically 10 to 20 years, when you pay back both principal and interest. Most HELOCs have variable rates, so payments change as market rates rise or fall.
What is a cash-out refinance?
A cash-out refinance replaces your current mortgage with a larger loan. At closing, your existing mortgage is paid off, and you receive the difference between your new loan amount and your old balance in cash.
Check your cash-out refinancing rates. Start hereFor instance, if you owe $200,000 on your home and take out a new $280,000 mortgage, you’d receive roughly $80,000 in cash (minus closing costs). You’d then make payments on the full $280,000 at the interest rate and term of your new loan.
Keep in mind, cash-out refinancing resets your mortgage term. If you were 10 years into a 30-year loan, refinancing means you start over with a new 30-year term, extending the total time to repay your mortgage.
How second mortgages and cash-out refinances compare
Both loans turn home equity into cash, but they work differently.
| Factor | Second Mortgage | Cash-Out Refinance |
| Impact on existing mortgage | Keeps it intact | Replaces it entirely |
| Interest rates | Higher (second lien position) | Lower (first lien position) |
| Closing costs | Typically lower | Higher (2-5% of loan amount) |
| Monthly payments | Adds a second payment | Single consolidated payment |
| How funds are received | Lump sum or credit line | Lump sum at closing |
Second Mortgage vs. Cash-Out Refi: Key Differences at a Glance
Your existing mortgage rate:
- Second mortgage: Keeps your current mortgage — and its rate — intact
- Cash-out refi: Replaces your entire loan, meaning you give up your old rate
Interest rates on new debt:
- Second mortgage: Higher rates due to added lender risk
- Cash-out refi: Lower than second mortgages, but slightly higher than standard refis
Closing costs:
- Second mortgage: Typically lower; some HELOC fees may be waived
- Cash-out refi: Usually 2%–5% of the loan amount
Loan terms & repayment:
- Second mortgage: Separate loan with its own (often shorter) term
- Cash-out refi: Resets your mortgage timeline and may extend repayment
How you get the cash:
- HELOC: Draw funds as needed and pay interest only on what you use
- Home equity loan / cash-out refi: Lump sum at closing
Pros and cons of getting a second mortgage
A second mortgage can be a smart way to access equity, but it comes with trade-offs to understand before you apply.
Compare HELOC rates. Start herePros of a second mortgage
- Preserves your existing mortgage rate. You keep your current rate on your full original balance.
- Lower closing costs. Less expensive upfront than a full refinance.
- Flexible borrowing options. Choose between a lump sum (home equity loan) or revolving credit (HELOC).
- Faster closing timeline. Many second mortgages close in 2 to 4 weeks, compared to 30 to 45 days for a refinance.
- Borrow only what you use. With a HELOC, you pay interest only on funds you actually draw.
Cons of a second mortgage
- Higher interest rates. Expect rates 1% to 2% higher than first-lien loans.
- Two monthly payments. You’ll manage separate payments to two different lenders.
- Variable rates on HELOCs. Your payment can increase if interest rates rise.
- Additional lien on your home. Two loans secured by the same property can complicate a sale or refinance later.
Pros and cons of a cash-out refinance
Cash-out refinancing offers its own benefits and drawbacks. The right choice depends on your current mortgage terms and your goals.
Compare cash-out refinance rates. Start herePros of a cash-out refinancing
- Single monthly payment. Everything consolidates into a single loan with a single lender.
- Potentially lower interest rate. First-lien loans carry better rates than second mortgages.
- May reduce your overall rate. If current rates are below your existing mortgage rate, you could save money.
- Simplicity. One loan to manage, one statement to track, one lender to contact.
Cons of a cash-out refinancing
- Higher closing costs. Expect to pay 2% to 5% of your total loan amount.
- Restarts your loan term. Resets amortization, potentially adding years to the payment schedule.
- Loses your existing low rate. Your favorable rate disappears on your entire balance, not just the new cash.
- Longer closing process. Full underwriting, appraisal, and documentation requirements.
When is a second mortgage a good idea?
A second mortgage often makes more sense when preserving your current mortgage terms outweighs the benefits of consolidation. This option works well when:
- You have a low mortgage rate you want to keep.
- You’re borrowing a smaller amount relative to your home’s value.
- You want lower upfront closing costs.
- You prefer flexible access to funds over time (HELOC)
- You’re close to paying off your first mortgage and don’t want to restart the clock.
When does a cash-out refinance make sense?
A cash-out refinance is a suitable option when the math works in your favor or simplicity matters most.
- Current market rates are lower than your existing mortgage rate.
- You want to consolidate high-interest debt into one payment.
- You’re borrowing a large lump sum.
- You prefer managing a single monthly payment.
- You want to change your loan term or switch to a different loan type.
How to decide between refinancing and a second mortgage
Choosing between a cash-out refinance or a second mortgage comes down to a few key questions about your situation:
Compare home equity options with multiple lenders. Start here- What's your current mortgage rate? If it’s well below today’s rates, a second mortgage likely makes more sense.
- How much do you want to borrow? Smaller amounts often favor second mortgages; larger amounts may get better terms through a cash-out refinance.
- Do you prefer one payment or two? Cash-out refinancing simplifies your monthly obligations.
- How long will you stay in the home? Higher closing costs on a refinance take longer to recoup.
Tip: Run the numbers both ways. Calculate your total monthly payments and total interest paid over time for each option. The answer often becomes clear when you see the actual dollars involved.
Find the right way to tap your home equity
Both second mortgages and cash-out refinances can be smart financial tools when matched to the right situation. The better choice depends on your current mortgage rate, how much you want to borrow, and your comfort with managing multiple loans.
If you locked in a favorable rate during the low-rate years of 2020-2021, keeping that rate with a second mortgage often makes the most sense. If your current rate is higher than today’s market rate, or you prefer the simplicity of a single payment, a cash-out refinance is worth considering.
Time to make a move? Let us find the right mortgage for you
FAQs about second mortgages and cash-out refinancing
Second mortgages, especially HELOCs, often close faster, typically 2 to 4 weeks, compared to 30 to 45 days for a cash-out refinance. The shorter timeline reflects less paperwork and a simpler underwriting process.
Your second mortgage stays in place unless you specifically pay it off. However, the second-lien lender typically must agree to remain in the subordinate position behind your new first mortgage, a process called subordination.
You can, though options are more limited. Some lenders offer refinancing of home equity loans or modifications to HELOCs. You'll generally want your first mortgage lender's awareness since any changes affect the overall lien structure on your property.
