How does Homeowner Refinance when they have a Second Mortgage?

Martins Chima

There are many questions about how to refinance when you have a second mortgage by people who already owns a home. Most people knows that it is really important to understand how secondary loans work so that they can talk to their lenders for mortgage deals. Why? It is because, they want to be able to handle any complications and make smart choices that match their financial goals.

What is a Second Mortgage?

A second mortgage refers to a type of loan that is secured by the equity in your home. It’s called a “second” mortgage because it’s in addition to your primary or first mortgage. Essentially, it’s a way for homeowners to tap into the value they’ve built up in their property.

How does Second Mortgage Work?

Here’s how it works: Your primary mortgage is the loan you used to purchase your home. A second mortgage is an additional loan that you take out on top of your primary mortgage. The amount you can borrow with a second mortgage is typically based on the equity you have in your home, which is the difference between the current market value of your home and the amount you still owe on your primary mortgage.

Types of second mortgages:

There are two common types of second mortgages:

Home Equity Loan: With a home equity loan (HELOC), you receive a lump sum of money upfront and then make regular fixed payments over a specific term. The interest rate is usually fixed.
Home Equity Line of Credit (HELOC): A HELOC is a revolving line of credit that allows you to borrow against your home equity as needed. Similar to a credit card, you can borrow, repay, and borrow again during the draw period. The interest rate is often variable.

Second mortgages can be used for various purposes, such as home improvements, debt consolidation, education expenses, or major purchases. However, since a second mortgage is secured by your home, it’s important to make payments on time, as failure to do so could result in the lender foreclosing on your property.

How to refinance when you have a second mortgage

Refinancing your mortgage may seem difficult but it is easy as ABC if you know the step by step guide. But when you don’t have the idea or you have an extra loan like a home equity line of credit home (HELOC) or a home equity loan, it may get more difficult altogether.

But if you follow the right steps, then refinancing the second loan, like a home equity loan, it is not too hard. However, if you want to refinance your main mortgage, it becomes more work. You’ll need to pay off the second loan first or get the second lender to agree to something called re-subordination. Getting that agreement is not easy and isn’t guaranteed, but you have to try.

Resubordination involves entails gaining the second lender’s approval to reestablish the priority of the primary mortgage over the second loan during a refinance. However, securing this agreement is far from guaranteed and hinges on several factors, including the lender’s policies and your financial profile.

Can a Homeowner refinance a second Mortgage?

Yes, a homeowner can refinance a 2nd mortgage. Basically, the good news for borrowers is that refinancing a second mortgage doesn’t require a lot of extra work. This is because your second loan is already in a lower priority position compared to your main mortgage. So, when you refinance it, the order of importance for lenders who might want to claim your home if you miss payments doesn’t change.

5 Steps for refinancing your second mortgage as a Homeowner

Refinancing a second mortgage is similar to refinancing any other loan. Just follow these steps:

Check if you’re eligible: Make sure you have enough equity and decent credit to qualify.
Set your goals: Are you refinancing to lower payments, get a better rate, or something else? Your goal will shape your loan search.
Compare lenders: Look at the loan options from different lenders and find the best one for you.
Apply for Mortgage refinancing: Approach your lender, fill out an application and wait for approval. You’ll need to provide financial documents to show you’re eligible. This involves the full lending process, including home appraisals and such.
Don’t apply for other loans: Changing your credit during the process can be a red flag. So, hold off on applying for other loans until the refinance is done.

Top Mortgage Guide to help you choose:

Can a Home Owner refinance their Primary Mortgage when they have a second mortgage?

Yes, you can refinance your primary mortgage when you have a second mortgage. But it may be a little difficult if you don’t know the whole procedure. Secondly, you must have to fulfill all the necessary requirements.

Normally, if you can’t pay your mortgage, the primary lender gets first claim, and the second lender comes next. If you refinance your main mortgage, the second loan becomes the oldest one against your home. This means the second lender gets the first claim if you can’t pay.

To refinance your main mortgage, you usually need the second lender to agree to “resubordination.” This means they agree to let the primary lender have the first claim again. However, this can involve fees, and not all lenders will agree.

If you want to try this, your main lender needs to submit a package of documents to the second lender. This shows why they should agree. The second lender might charge around a few hundred dollars to review this package, and it could take up to six weeks for them to approve it.

Second (2nd) Mortgage refinance rates

Second mortgage refinance rates can vary depending on several factors, including your credit score, the lender you choose, the amount of equity in your home, and current market conditions. Generally, second mortgage refinance rates may be slightly higher than first mortgage rates due to the increased risk for lenders.

We normally advise people to shop around and compare rates from different lenders to find the best deal for your situation. Keep in mind that refinance rates can change frequently, so it’s a good idea to monitor rates and lock in a rate when you find one that works for you.

Lastly, remember that the specific terms and rates you’ll be offered will depend on your financial profile and the details of your refinance. So it’s best to reach out to lenders directly or use online tools to get personalized rate quotes depending on your circumstances.

Pros and Cons of refinancing your 2nd Mortgage

Before you decide to refinance a second mortgage, it’s important to weigh the advantages and disadvantages to ensure it’s a wise choice.

Pros of Refinancing Second Mortgage:

Refinancing can lower the interest rate, leading to savings.
Monthly payments can be reduced by either lowering the interest rate or extending the loan term.
You can switch from a variable interest rate to a fixed interest rate loan.

Cons of Refinancing Second Mortgage:

Refinancing involves paying closing costs.
If market rates have gone up or your credit score has decreased, you might end up with a higher interest rate.

What Options do you have when resubordination is denied for refinancing?

One approach is to repay the second loan, which can be done using available funds or through a cash-out refinance. However, you have to make sure that you maintain at least 20% equity in the property after the cash-out refinance. If your equity falls below this threshold, you might end up having to pay for private mortgage insurance, which could offset the benefits of refinancing.

Adding extra debt to your refinance might make lenders more cautious about approving the new loan. Consequently, your interest rate could be slightly higher.

Alternatively, you could try all other options of finding a lender who offers both first and second mortgage refinance simultaneously. This strategy enables you to retain the second mortgage credit line while obtaining a new first mortgage. Now, to review such options, you might consider working with a mortgage broker who can guide you through these types of refinancing arrangements involving a second mortgage.

Second mortgage vs Home Equity loan

Both second mortgages and home equity loans are types of loans that use your home’s equity as collateral, but they serve slightly different purposes and have different features:

Second Mortgage:

A second mortgage is a type of loan that’s taken out in addition to your primary mortgage.
It’s also known as a “second lien” because it’s a secondary loan secured by your home’s equity.
Second mortgages can come in the form of a lump sum loan or a line of credit.
These loans often have fixed interest rates and fixed monthly payments.
The funds from a second mortgage can be used for various purposes, such as home improvements, debt consolidation, education expenses, or other major expenses.
You’ll have a separate monthly payment for the second mortgage in addition to your primary mortgage.

Home Equity Loan:

A home equity loan is a specific type of second mortgage where you receive a lump sum of money based on your home’s equity.
It’s sometimes called a “closed-end” second mortgage because you receive a set amount of money upfront.
Home equity loans usually have fixed interest rates and fixed monthly payments.
The funds from a home equity loan can be used for specific purposes, similar to a second mortgage.
Like a second mortgage, you’ll have a separate monthly payment for the home equity loan alongside your primary mortgage.

In summary, both second mortgages and home equity loans involve borrowing against your home’s equity, but a second mortgage is a broader term that can include various types of secondary loans, while a home equity loan specifically refers to a lump sum loan based on your home’s equity. The choice between the two depends on your financial goals, needs, and preferences.

Frequently asked questions to help you refinance your second mortgage

How does refinancing a second mortgage affect my credit score?

Refinancing a second mortgage can have an impact on your credit score. When you apply for a new loan, including a 2nd mortgage refinance, your credit score might experience a temporary decrease by a few points.

This is due to the credit inquiry and the new account being added to your credit report. However, as you make consistent payments on the refinanced loan and reduce your debt, your credit score should gradually improve over time.

Is refinancing a second mortgage worth all this stress?

Whether refinancing a second mortgage is worth it depends on your different circumstances. Here are a few situations where it might be beneficial:

Cost Savings: If you can secure a lower interest rate through refinancing, it could lead to overall savings on the loan.
Lower Monthly Payments: Refinancing could potentially reduce your monthly payments, making your finances more manageable.
Fixed Rate: If you’re currently on a variable interest rate and want more predictability in your payments, refinancing to a fixed rate could be advantageous.

Ultimately, the decision to refinance a second mortgage should align with your financial goals and the potential benefits outweighing any associated costs, such as closing fees. It’s advisable to carefully assess the terms, do the math, and consider consulting with a financial advisor to determine if refinancing makes sense for you.