Both let you use your home’s equity to clear high-interest debt. They work differently, they cost differently, and the right one usually comes down to what breaking your current mortgage would cost you.
The refinance
You replace your existing mortgage with a new, larger one and take the difference in cash. One mortgage, one payment, at first-mortgage rates.
Cleanest option when it fits. The obstacle is the penalty for breaking your current term, which on a fixed mortgage can be an interest rate differential running into thousands.
The second mortgage
Your existing mortgage stays exactly where it is. A second lender registers behind it and advances funds against the remaining equity. You now have two payments.
The rate is higher, often considerably, because that lender is second in line if anything goes wrong. There are usually lender and broker fees on top.
It exists because sometimes the alternative is worse.
How to tell which one you need
Refinance if your penalty is small or you are near renewal, you have room under 80 percent of your home’s value, and your income and credit support a full new approval.
Second mortgage if your penalty is enormous, you hold a rate far below today’s market and giving it up would cost more than the second mortgage does, your credit will not support a new first mortgage right now, or you need the money quickly.
The comparison that actually decides it
Run both as total cost, not as rate.
Refinance: penalty plus legal plus appraisal plus the interest over the period you will hold it.
Second mortgage: fees plus the higher interest over the same period.
People fixate on the second mortgage’s rate and forget the refinance penalty is a real number too. Sometimes an 11 percent second mortgage for two years beats a refinance carrying a nine thousand dollar penalty. Sometimes it is nowhere close.
Treat a second mortgage as temporary
When I place one it usually has an exit built in, most often refinancing everything into a single mortgage at your next renewal, once the penalty disappears. A second mortgage is a bridge to that point rather than a place to settle.
If you are weighing these up, would it help to see both totals side by side on your own numbers?
General education, not financial advice. Figures are illustrative and subject to lender approval (O.A.C.). Lora Fenn, Mortgage Agent Level 1, Lic. #M25003153. Dominion Lending Centres YBM Group, FSRA #11129. 705-881-2780 · lfenn@dominionlending.ca
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