How To Refinance When You Have A Second Mortgage

Westend61/Getty Images: Illustration by Issiah Davis/Bankrate

Refinancing a second mortgage — like a home equity loan or home equity line of credit (HELOC) — is a popular way for many to get a lower interest rate.

A second mortgage is simply an additional loan a mortgage holder takes out, using their home as collateral. The equity you have in your home backs the new loan.

Swapping out a second mortgage for another second mortgage is straightforward, but it can get tricky if you’re refinancing your first and second mortgage together. Let’s break down how refinancing a second mortgage works.

Can you refinance a second mortgage?

The good news for borrowers is that you can refinance a second mortgage without too much additional effort. The reason for this is that your second loan is already subordinate to your primary mortgage, so refinancing it doesn’t change the order of priority for lenders who may want to make a claim against your home if you stop making payments.

The main thing to know when refinancing a second mortgage — or exploring a refi for your primary mortgage — is that the older loan gets repayment priority. If you default, the lender behind the loan you’ve had longer gets paid back first (e.g., if you sell your house). That pecking order plays a big role when refinancing first and second mortgages.

To refinance just your second mortgage, you’ll need to meet typical mortgage requirements, such as having sufficient equity, good credit and enough income to afford the new loan.

Types of second mortgages

Here are three types of second mortgages:

• Home equity loan: A home equity loan lets you convert your home equity into a lump sum of money, which you typically pay back with a fixed interest rate over 5 to 30 years. Refinancing a home equity loan is generally pretty straightforward, especially if you have good credit and adequate home equity.
• Home equity line of credit (HELOCs): A HELOC also converts your equity into money. It is a line of credit that you usually can draw on for 10 years and then pay back over 20 years at a variable interest rate. Refinancing a HELOC can be trickier due to its variable rate and the draw and repayment structure, but it’s still possible with the right financial qualifications.
• Piggyback mortgage: A piggyback mortgage helps fund a down payment on a house, allowing you to avoid paying for mortgage insurance or taking out a jumbo loan. Refinancing a piggyback mortgage is more complicated because it involves coordinating two loans.

5 steps for refinancing your second mortgage

Refinancing a second mortgage is a lot like refinancing any other loan. You’ll need to follow these steps.

1. Check your eligibility. Make sure you have sufficient home equity, a solid credit score (at least 620), a manageable debt-to-income (DTI) ratio, and a loan-to-value (LTV) ratio within acceptable limits — typically 80 percent or less.
2. Determine your goals. Are you refinancing to lower your monthly payment, secure a lower rate, or something else? The answer will guide your loan search.
3. Compare lenders. Look at the loans offered by different lenders and try to find the best one for your situation. Reading mortgage lender reviews can help you narrow down your search.
4. Apply. Fill out an application and be ready to provide financial documents that prove your eligibility. Typically, this will include things like pay stubs, tax returns, W-2s and bank statements. Lenders will want to verify your income, assets and debts during this time. You also likely need a home appraisal.
5. Avoid applying for other loans. Changes to your credit during underwriting can be a big red flag, so don’t attempt to go after other loans before the refinance is finalized. It’s also a good idea to avoid applying for new credit cards during this time.

Pros and cons of refinancing your second mortgage

Before refinancing a second mortgage, consider the pros and cons to make sure it’s a good idea.

Pros

• Lower your interest rate, saving you money
• Reduce your monthly payments by lowering the rate or extending the term
• Change from a variable rate to a fixed rate

Cons

• Incurring closing costs
• Paying a higher interest rate if market rates have risen or your credit score has dropped

Can you refinance your primary mortgage when you have a second mortgage?

Yes, it’s possible to refinance your primary mortgage if you have a second loan, but it gets complicated.

Typically, your primary lender has the first claim if you default on your mortgage, with the second mortgage lender having the second claim. If you refinance your primary mortgage, your second mortgage will become the oldest loan against the home, giving the second lender first claim in foreclosing on it.

Most mortgage lenders don’t like that. To refinance your primary mortgage, you’ll usually need to get the second lender to agree to resubordination, ceding the first claim in the event of default to the primary lender again. Some lenders won’t be willing to resubordinate. If they are, it usually means you’ll be paying fees.

To go this route, before you can refinance your primary mortgage, your mortgage lender must submit a subordination package — all of the documents supporting the request — to the institution holding your home equity loan or line of credit. The second mortgage lender, if they want to go along, typically charges a few hundred dollars to review the package, and approval can take up to six weeks.

Options when resubordination is denied

• If your home equity lender refuses to subordinate but you still want to refinance, one solution would be to pay off the second loan, either with your own funds or through a cash-out refinance.
• Another strategy is to find a lender that will refinance both your first and second mortgages at the same time. This will allow you to keep the second mortgage credit line and replace the first.
• Working with a mortgage broker may also help, as they often have access to resources that can accommodate more complex refinance situations (like those involving second mortgages).

Keep in mind that adding extra debt during a refinance may make lenders less keen to approve your new loan, possibly resulting in a higher interest rate.

You must also retain at least 20 percent equity in the property after a cash-out refinance, or you’ll be required to pay private mortgage insurance, which may reduce or even eliminate your refi savings.

Is refinancing a second mortgage right for you?

Refinancing a second mortgage can be worth doing in a few scenarios, such as when it saves you money overall, reduces your monthly payment or converts the rate from a variable interest rate to a fixed one. It works best if interest rates have substantially dropped since you took out the loan and if you have good credit, steady income and manageable debt.

Bottom line

Refinancing with a second mortgage can be complicated, but it’s definitely possible with the right qualifications and prep work. Understanding your options can help you make the best decision, and with good equity and credit, you should be able to successfully refinance and ideally improve your loan terms.

FAQ about refinancing a second mortgage

• What is a second mortgage?
  

  A second mortgage is an additional loan that a mortgage holder takes out, using their home as collateral. The equity you have in your home backs the new loan. Despite the name, a second mortgage is not typically used to purchase a second home, but rather to access your home’s equity to pay for things like home improvements.

• How does refinancing a second mortgage impact your credit score?
  

  Applying for any new loan temporarily lowers your credit score by a few points. However, as you pay down the refinanced loan, your score should improve based on your dropping debt and improving payment history.

• Is paying off a second mortgage considered cash-out?
  

  Yes, paying off a second mortgage as part of a refinance is typically considered a cash-out. That’s because you’re using your home equity to pay off debt beyond your original first mortgage balance.

• Can you get a first and second mortgage at the same time?
  

  You can get a first and second mortgage at the same time. This is often called a piggyback loan and is commonly used to avoid private mortgage insurance.