Refinancing becomes a little more complicated when you have a second mortgage. With just a first mortgage, you pay off the first mortgage and take on a new one. It is not that simple when you have a 2nd mortgage there. That second mortgage actually takes first lien position when you pay off your first mortgage. It does not matter that you are taking out another loan in the place of your first mortgage. That second lienholder automatically gets 1st place. Obviously, no first mortgage lender will let that happen. In order to get approved, you will have to decide how to proceed.
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Explore Your Options
You have a few options when it comes to refinancing with a second mortgage. The easiest would be to pay your second mortgage off. If you have a HELOC with a low balance this may be possible. Otherwise, you may have to look at your other options. We discuss them below:
- Closing the HELOC – It is not enough to pay the HELOC off; it still exists. Remember, it works like a credit card. You will still have an available balance. If you want to refinance your first mortgage, though, you will have to not only pay the HELOC off, but also close it. You must then provide the new lender with proof that you closed the HELOC.
- Refinance into one loan – If you have the equity in your home, you may be able to refinance your first and second mortgage into one loan. This takes away any subordination issues. You pay off both loans at the same time. You then take out one larger new loan.
- Subordinate the 2nd mortgage – If your second mortgage lender is willing, you can resubordinate the 2nd Your new lender can request this on your behalf. Basically, it asks the lender to remain in the second lien position. The bank holding the second lien is not required to accept the terms, though. It is best to talk to your current lender to see what they require.
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Qualifying for the Refinance
Each of the options above have different requirements. Knowing how you can qualify will help you decide which option is right for you.
- If you close your HELOC – This is the easiest option. As long as you have the assets to pay off the HELOC, you do not need anyone’s approval. It is best if you pay the HELOC off before you apply for the new loan, though. If you tell, the lender that you plan to pay the loan off, they may want to verify your assets. This could impact your approval on the first loan. Taking care of the process before you apply for the new loan can avoid any problems.
- If you refinance into one loan – Taking out a bigger loan means a higher loan payment. This may increase your debt ratio and LTV. You will have to make sure you still qualify for the program. Since it is considered a cash-out refinance when you pay off your second mortgage, you will have lower LTV maximums. For example, conventional loans usually allow a maximum of 80% on a cash-out refinance.
- If you subordinate – Subordinating your second mortgage may not have much of an impact on your ability to qualify for the loan. The largest issue would be your debt ratio again. If your new first mortgage doesn’t have a payment that is much higher though, it may not be much of an issue for you.
What Makes More Sense?
You have many options when you want to refinance your first mortgage. Stop and think about which option makes the most sense for you. If you use your HELOC for emergencies, you may want to keep it open. Closing it may put you in a bind down the road. If that is the case, you may want to subordinate it. Again, talk to your lender before you apply for the new loan. See if they allow subordinations. If they do, ask what requirements they have. This way you know what to expect. Some lenders make it simple while others do not.
If you do not need your HELOC, closing it and starting over may make the most sense. If you use your HELOC for something other than emergencies, it may be important that you close it. Eventually that HELOC will become due and payable. This could make your housing payments much higher than you are used to paying. Taking the lead and closing it now may help. If you refinance your first mortgage with a lower rate, it could save you even more money in the end.
Of course, if you have a second mortgage that you can’t afford to pay off, you will need to subordinate it. The process itself isn’t that difficult. It’s more about waiting for the lender to process it. Some lenders may make you jump through a few hoops. Inevitably, though, they know they will always have 2nd lien position. It helps if your loan is in good standing and that your other qualifying factors are in place. If you have a high debt ratio, low credit score, or late payments, it may be harder. Make it as enticing as possible for the lender to want to subordinate your loan again.
Refinancing your mortgage with a second mortgage already in place may take a little longer than without it. You have to figure out how to handle that 2nd lien. The ideal situation is to pay it off and forget it. If that’s not possible, though, there are ways to work around it. Talk with several lenders to see what options are available to you.
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