If you took out a mortgage when you bought your house, then you took out a home equity loan or home equity line of credit (HELOC) later on, that can make things complicated if you want to refinance your primary loan. These are some options to consider.
How First and Second Mortgages Work
A home equity loan or HELOC is considered a second mortgage. If you refinance your first mortgage, the holder of your home equity loan or HELOC will have the legal right to become the first lienholder. That means that if you wind up in foreclosure, the holder of the second mortgage will get paid first. Lenders refinancing first mortgages generally won’t agree to those terms because it makes things too risky for them.
The holder of a second mortgage can agree to re-subordination. That means that in the event that you lose your house in foreclosure, the holder of the second mortgage will get paid after the holder of the first mortgage.Â
If you decide to pursue re-subordination, your first mortgage lender will have to submit a series of documents to the lender that issued the second mortgage. You will have to pay a fee to have the second mortgage lender review your request, and it might take several weeks to get a response. The lender that approved your home equity loan or HELOC will most likely approve a request for re-subordination, as long as you have enough equity and you have consistently made your payments on time.Â
How to Refinance If You Have Two Mortgages
You might want to consider a cash-out refinance. If you do that, you will be able to tap into your home equity, refinance your primary loan for more than the current balance, and pay off the second mortgage, eliminate credit card debt, fund home improvements or use the extra money in another way. You will have to maintain at least 20% equity after the refinance to avoid having to pay for private mortgage insurance.
A second mortgage lender might refuse to resubordinate if you want to do a cash-out refinance that will significantly increase your monthly payments. The second lender might be concerned that you will be unable to afford the higher payments, you will default, and the company won’t get paid if you wind up in foreclosure. If the second mortgage lender denies your request for re-subordination or refuses to consider it, you can pay off your second mortgage, if you don’t have enough savings available to do that.Â
It might be possible to consolidate your first and second mortgages into one loan. Depending on your credit score and the amount of equity you have, you might be able to get a lower interest rate than you currently have and reduce your total monthly payments.
