The role of the second mortgage in a refinance situation can sometimes be a challenging obstacle to overcome. Second mortgages usually come in the form of a (HELOC) home equity line of credit or an equity line behind a first mortgage secured against a primary residence, second home or investment property.
As values in Sonoma County have fallen in recent years and affordability has come back for buyers, many people looking to refinance have challenges because of second mortgages.
Second Mortgages in refinancing scenario can cause the loan to be restructured.
The second mortgage in refinance scenario can cause a loan to be restructured because of the loan to value. After procuring a home appraisal, a real loan to value is determined. Sometimes it makes sense to pay off both the first mortgage and second mortgage in one new loan due to certain loan-to-value restrictions and other times, with second remaining in place, a subordination is required. Getting a subordination from the second lien holder can take upwards of 30 to 45 days and most banks charge $350 to determine whether or not they will allow subordinate. Make no mistake, a subordination is permission provided by the second lien holder to refinance the first mortgage.
Most second mortgages are also adjustable-rate mortgages. With long-term fixed-rate money so low ie low 4’s on 30 year fixeds, paying off both the first and the second can make a lot of sense. Because of the fact the second is an arm, there will be at an interest rate adjustment at some point in the future when the Federal Reserve reverses course and monetary policy into a Fed Tightening Cycle where short-term interest rates rise.
What about fixed rate second mortgages in a refinance transaction?
Depending on whether not the refinance scenario is a rate and term for payment reduction, it might make sense to pay down the principal balance of the mortgage if it will reduce the monthly payment. The majority of refinance loans being originated today are for payment reduction. If a loan to value challenge arises, there is always the possibility of paying down the principal balance or depending on whether the loan is owned by Fannie Mae or Freddie Mac, looking at the Obama Refinance Program which is slated to take effect on November 15.
If I have a second mortgage loan on my property what constitutes a rate and term refinance for a cash out refinance if I’m not getting any cash at hand?
This depends on whether not the mortgage was taken out as a purchase money mortgage or after-the-fact. If it’s a non-purchase money mortgage, it more than likely will be considered a cash out refinance even if you are not getting any cash at hand because it is non-seasoned. Depending on the guidelines of the Santa Rosa mortgage lender you are working with, you might be able to get away with doing a rate and term refinance if there are no draws on the equity line in the last 12 months and you are closing out this second mortgage as a result of completing the refinance.
If I have a second mortgage on my property how does that affect my qualifying ability?
Well if you’re trying to complete a refinance on your primary residence, investment property or even second home. Mortgage lenders will take the full line amount to qualify you, not what is actually owed on the line amount. For example if you have a $200,000 home-equity line of credit and you have a $100,000 balance, the loan will be underwritten as though you have a $200,000 balance because they factor in the whole amount of the credit line.
If my value comes in lower on my refinance, how can I get the loan done and still save money?
You can elect to pay down the principal balance of the mortgage, and in some cases gift funds are allowed or you can look at doing the Obama Refinance Program. However, the majority of the time the mortgage lender you’re working already tried to qualify you on your Obama Refinance Program because there is no appraisal required. Your loan has to be owned by Fannie Mae or Freddie Mac in order to qualify. If it is not owned by one of these two entities, you are ineligible for the Obama Refinance.
The roll a second mortgages in a refinance transaction can sometimes be complicated.
This is why it’s extremely important to make sure the mortgage lender you are working with is well aware of the guidelines associated with second mortgages and how they will affect your refinance scenario. If you’d like to get a complementary mortgage rate quote for refinancing for your first mortgage or combination of both your first and second mortgage, fill out this easy no obligation mortgage rate quote.
Talk with a qualified mortgage lender about the role of second mortgages in refinancing.