How to Refinance with a second Mortgage

In the early part of this decade second mortgages grew rapidly in popularity. They were a great way for home buyers to borrow more than 80% of a property’s value without having to pay mortgage insurance premiums every month. Many banks and lenders offered 100% financing with these 80/20 mortgage programs. Down the road the home owner may want to refinance and must decide how to handle that second mortgage.

If you have a second mortgage on your home and are interested in refinancing you have two options:

1) Pay off the second mortgage with a refinance loan. You may be able to refinance both your first mortgage and your second mortgage into one larger loan. Whether you will qualify for this option will depend on the amount of equity in the property among several other factors. The amount of equity required will depend on the program you are applying for. Some will only allow up to 80% of the value to be borrowed, while some FHA loans will go up to 97.75%.

2) Subordinate the second mortgage. You may have the option of keeping the second mortgage as is and refinancing only the first mortgage. In order to keep the second mortgage the bank or lender who holds the loan will have to agree to “subordinate” or accept that they are second in line to be repaid in the event the property is foreclosed on. Check with the company you send your payment to each month to find out what their current policies are on subordinating. Be prepared that it may take some time to get the needed paperwork completed and plan accordingly when arranging your refinance.

If both options are available to you take a look at the mortgage rates of each loan to decide what makes the most sense. If your second mortgage has a higher rate than your new refinance loan it will likely make sense to pay it off. It will also probably be a wise move to pay off a second that has a very low balance as it will generally not be worth the time, effort, and fees it will take to subordinate.

Home owners may choose to subordinate a second mortgage with a very low interest rate, or a home equity line of credit that they prefer to hold onto in case of a need to access the credit in an emergency.