When you wish to refinance, yet you have two mortgages on the property, you have some decisions to make on how to refinance. How the process takes place will depend on your total loan-to-value ratio as well as the position of the 2nd lender on the topic of refinancing your loan. Some lenders will continue to accept the 2nd lien position and allow you to refinance your first mortgage with no problems while other lenders will require you to refinance the first and second mortgage into one mortgage in order to be able to refinance.
One of the options that you have is to combine the first and second loan into one loan. This is only possible if you have the room in your loan-to-value ratio. If you do not have enough equity in your home to qualify a larger first loan, it will be impossible to combine your loans. Keep in mind that when you fill out the mortgage application, you will need to state why you received the 2nd mortgage in the first place. If you received it after you purchased your home, it is considered a cash out refinance and you will be stuck with stricter regulations in terms of debt ratios and LTVs making it a little more difficult to combine the loans.
Get a Piggy Back
If your loan-to-value ratio is high, you might be able to get a piggy back loan on a refinance. This is the same as a piggy back loan for a purchase, with the exception that you are not purchasing a home. The first loan that you obtain will be for the maximum amount that you are able to have, typically 80 percent and the piggy back loan will be for the remaining amount. This is not considered a cash-out refinance as you are not taking out any cash, you are simply refinancing in order to get a better rate and/or term, such as would be the case if you were trying to refinance out of an ARM.
Pay Down your Home Equity Loan
Sometimes in order to be approved for a refinance on a first mortgage, the lender will require that your home equity loan is paid down. This does not mean paid off, but the balance might need to be lower than it is at the moment in order to lower your debt-to-income ratio. Lenders look very closely at DTIs and if yours is close to the limit, it could be denied unless you pay down your home equity loan. Keep in mind that some lenders use the full amount of your home equity loan to figure your DTI as a precaution since you do have the ability to max it out at any time if you are keeping it. If this is the case, paying down your home equity loan will not work and you might have to cancel if it you want to refinance.
Making the Right Decision
Every situation will be different in terms of what should be done about a second loan. If you are trying to save money every month and your HELOC is causing a problem, it is best to refinance it into the first mortgage or cancel it if it has a zero balance. This will allow you to take advantage of the lower rates that are available, saving you more money every month. If you are not able to eliminate your second mortgage, it is important to find out if your lender for the second mortgage is willing to subordinate if you refinance. If they are not willing, then you will not be able to take advantage of the lower rates for refinancing and will have to reconsider your situation. In most cases, lenders will agree to subordinate as long as there are not weird stipulations in your first mortgage, which in today’ strict lending, typically do not happen.Click to See the Latest Mortgage Rates»