What to know about refinancing with a second mortgage

Many people desiring to refinance are taking advantage of historically low-interest rates. One of the challenges when refinancing your house is when you have a second mortgage. Here is what you need to know if you’re trying to refinance and you have a second loan…

If your desired to refinance and you have a first mortgage and a second mortgage on your home you might run into some challenges here are the things you need to know

A second mortgage is a second lien on your home. If you’re trying to refinance your first mortgage and keep your second mortgage you must get what’s called subordination. A subordination is when the second lien holder of the mortgage company allows gives you permission to refinance your first mortgage. Where things can become dicey is the mortgage company that you’re using to refinance your first mortgage needs to price out the loan specifically for the first mortgage and subordinating the total allowable line amount of your second. So let’s say you have a second mortgage for $200,000, but you have a line for $400,000. The lender must subordinate the entire line or meet the appropriate loan-to-value requirement on your refinance.

It could become particularly problematic if the second takes weeks to do a subordination.  As mortgage volume increases timelines follow suit and also increase which draws out the process longer.

Couple of things to be mindful of… Most conventional mortgage loan programs will allow you to refinance up to 95% combined loan-to-value. Alternatively, you can do a cash-out refinance and use a new first mortgage to pay off the first mortgage and the second mortgage balance closing out the second or the home equity line of credit for example.
Another alternative depending on your loan-to-value requirement is an FHA mortgage. An FHA mortgage as long as there are no draws on your second mortgage in the last 12 months will allow you to refinance the first mortgage and second mortgage into what’s called a rate and term refinance allowing up to a 97% loan to value. Granted that loan will have PMI, but that could be an alternative depending on what the terms of your second are and if you’re saving money.

When you have a second mortgage at play, that is not the time to be resistant to providing paperwork or providing additional documentation in lieu of the original documentation that was originally requested. Such attempts to try to circumnavigate lender requests for documentation only come at the extension of time which generally means more expenses and costs in the form of mortgage rate lock extensions.

So it’s critical when picking a lender to do your first mortgage they can lock in the interest rate on your first mortgage for a nice long time e.g. 60- 75 days. Now that might sound like a lot of time, but in this current situation with mortgages at historical levels having the extra time is ideal to support a successful close of escrow. Something to consider when refinancing to take advantage of these ultra-low rates.

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