Is is a second mortgage making your refinance harder? This tip may help…

May 7, 2020/Scott Sheldon

Mortgage lenders sometimes take an overly gun shy approach to how a mortgage loan is originated. One such example of this is if you have a first and a second mortgage on your home. Let us say your goal is to refinance and to not get any money out but just combine the first and the second mortgage into one new loan. You are not receiving any cash out at hand just looking to consolidate your payments so you can have one easy payment that blanketly covers both mortgages make sense right? Well not so fast…

Here’s why cost more because they are giving you cash in exchange for more debt, so lenders look at those loans as a little bit risky. Additionally, cash-out refinances require you to have a maximum loan-to-value for a primary house at no more than 80% loan to value that’s for both an FHA mortgage and Conventional mortgages.

As a result, let us see your first and second mortgage is pushing your loan-to-value up to say 85%. So now you have a Cash-out refinance and here is why. If you have a second mortgage on your house that is not purchased money, non-acquisition indebtedness and you are desiring to pay that off on a conventional mortgage, Fannie Mae and Freddie Mac consider that loan to be a Cash-out refinance. They charge you for a Cash-out refinance accordingly even though you’re specifically not receiving any monies cash out at hand.

Here are your options you pay the piper and you just get the cash out terms which are going to require a full appraisal report or depending on your situation and the appropriate loan-to-value you can get a little bit more creative. Here is one such example to support having your cake and eating it too. Shift course and look at going into an FHA mortgage instead. An FHA mortgage will allow you to pay off a first and a second mortgage as long as you have no draws on that second mortgage in the last 12 months and they will let you do it all the way up to 97% loan to value on a primary home. The value and beauty of FHA you can refinance into one mortgage as a rate and term refinance. The rates on FHA are extremely favorable, the downside to an FHA mortgage is you have to have monthly PMI which you might feel is unwarranted, but that is the cost of having a second mortgage is paying PMI potentially for short-term.

After 6 months goes by you can refinance your FHA mortgage into a conventional mortgage as a rate and term refinance which is the golden nugget of financing.  In other words by going into an FHA mortgage in order to do a rate and term refinance you are creating a foundation for yourself to make yourself lendable in the future to get the holy Mecca of financing which is a conventional loan without PMI. Something to think about if you are dealing with a high loan-to-value refinancing your house and are experiencing some financial adversity.

 

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RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

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