Taking out a mortgage on a home you own

You've heard plenty of times (whether from a family member or a dramatic scene of a TV series): "I may need to take out a mortgage on my home." Have you ever wondered what that actually means? 

Why would you take out a loan for something that's already yours, right? Or is your home really a gold mine you can take extra money on? This may or may not be foreshadowing, by the way. Let's break down what this phrase can mean though. 

Second mortgage vs refinance

Knowing the difference between these two is important. In order to understand the phrase "taking out a mortgage on a home you own" fully, you'll need to know that people are generally talking about one of these two options.

Take note: These are not the same thing.

While in general conversation some may think this is interchangeable, it is not. 

With a non-purchase 'second mortgage', you are taking out a loan against the equity you have already accumulated. Meaning, you have paid down your existing first mortgage, and/or your home's value has increased. The reason it is referred to as a second mortgage is because it is secured against your home, sitting in 'second position' behind your existing, first mortgage. 

On the flipside, with a first mortgage refinance, you are refinancing your current, first mortgage on your home in order to either lower your interest rate, or do a cash-out on the equity you've earned. Meaning, you're re-working the loan you are currently in the middle of paying and either lowering the interest rate (to now have a lower monthly payment on your home), or cashing out on the equity you've built up by your consecutive payments. Yes, that does mean more cash in your hands.

Loan against equity

If you're looking to go the route of a second mortgage with taking a loan against the equity, be sure that this is the best option for you.

After you've determined if this option works for your budget, you'll just need to follow a few steps for this one:

• • • Decide between a Home Equity Line of Credit (HELOC) or a basic home equity loan (sometimes referred to as a 'closed-end second').
    • Discuss a home appraisal with your local lender to see how much equity you have to tap into
    • Let them take you through the rest of the process

It might not be a bad idea to consult a financial professional to be sure you get a clear picture on how this might affect you in the long run. With a second mortgage, you are adding a payment into your monthly budget. However, if this does seem to be the right route for you, it can be a great option to utilize the full access of equity that you've built up in your home now that it's yours. 

Cash-out Mortgage

A cash-out mortgage can be a great option during the life of your loan. While there are several refinance options, this one is unique. Not only that, if you time the market right, you may be able to get a better rate on the newly, refinanced loan. But also because you can tap into your home's equity.

What does that mean? Cold, hard cash. Right into your pocket. This can be an extremely helpful decision when you've found yourself in a situation needing additional finances in your budget. Whether it be college funds, renovations or side projects, a cash-out refinance mortgage can be a great tool to tap into your equity. 

In order to inquire about a cash-out mortgage, just talk to a loan officer. They'll be able to walk you through applying and seeing if you qualify. 

So how does this seemingly magical equity work?

As described by The Balance, home equity is "the portion of your property that you truly 'own'." Essentially, it's the part of the home's value you've paid for. Meaning you now have an asset (or at least part of one) under your belt that is worth a good chunk of change. Just like most other items, if they're worth a certain amount, you can cash in on them to access what it's worth. In this scenario, you're taking out a loan on it.

When you start making payments toward your mortgage, it's not just going to pay off a debt. You are, with each payment, also paying towards a large investment – a house. A house that is worth a lot of money. Which you're probably aware of by now considering the price tag you had to agree on for it.

Whether you're looking at a cash-out refinance on an investment property or one on your everyday home, this can also be a helpful option to get cash out for outside, large payments that have come up. Regardless of the type of property, it's now your equity to use. For an emergency or not.

You can take a look at your situation to determine if refinancing is worth it. More times than not, it probably is. Especially when rates in the market are looking great and dropping. But be sure to communicate with a local loan officer to help you decipher and decide.