Countless Americans are struggling to make their current mortgage payments, even after taking out a second mortgage. More and more of them are looking into refinancing their existing mortgage and second mortgage, but they’re not sure if it’s actually possible for them. Can you refinance second mortgage loans? And can you refinance your first mortgage with a second mortgage?
The short answer to that question is yes. In this article, we will walk you through the steps to refinancing with a second mortgage and explain the pros and cons of refinancing. You’ll also learn about an alternative to mortgage refinancing.
Refinancing Your Mortgages
If you’re wondering, “Can I refinance a second mortgage?”, know that there are a few different ways to go about it. Refinancing can work for your first mortgage and second mortgage together into one, or you can refinance only the second home loan. Be sure to also understand whether or not a loan modification vs refinance is best for you.
Refinancing a First & Second Mortgage Together
It’s possible to combine your first and second mortgage into one and then refinance them together. This can be a great idea, especially if you have a piggyback loan. It can mean a significantly low monthly payment and, over time, more money in your pocket.
But watch out—refinancing a first and second mortgage together can be costly at first since you’ll be charged fees to apply. You’ll also have trouble getting approved if you don’t have enough equity in your home. That means this is not a great option for anyone who’s lived in the same home for a long time.
Refinancing a Second Mortgage
Refinancing a second mortgage alone can be difficult. That’s because a second mortgage is inherently riskier for the lender. After all, if you default on your payments and your house is repossessed, the first mortgage lender gets paid off first, and the second mortgage lender only gets whatever is left over.
That said, it’s not impossible. If you have a high income and a solid credit score and history, you have a good chance of being able to refinance your second mortgage with a lender.
When Is the Right Time to Refinance?
Timing Your Refinance
The decision to refinance should be timed to maximize your benefits. Consider market conditions, your personal financial situation, and long-term goals. If interest rates are low or your credit score has improved significantly since your original loan, it might be the perfect time to refinance.
Weighing the Pros and Cons
Advantages of Refinancing
Refinancing can potentially lower your interest rates, combine multiple mortgage payments into one, and provide a fixed rate for variable loans. It can also help in adjusting your monthly payment to better fit your current budget.
Disadvantages to Consider
However, refinancing comes with costs. Closing fees and potential penalties should be measured against the long-term savings. Additionally, refinancing can affect your credit score due to hard inquiries from lenders.
Understanding the Refinancing Process: A Step-by-Step Guide
Refinancing a second mortgage can seem daunting, but breaking it down into manageable steps can simplify the process. Here’s how to navigate the journey:
Step 1: Assess Your Refinancing Goals
Begin by determining what you hope to achieve through refinancing. Is it a lower interest rate, reduced monthly payments, or consolidating debt? Your goals will guide your refinancing strategy.
Step 2: Check Your Credit Score
Your credit score is pivotal in securing favorable loan terms. Obtain your credit report from the major bureaus and ensure all information is accurate and up-to-date.
Step 3: Evaluate Your Financial Health
Lenders will scrutinize your debt-to-income ratio and overall financial stability. Before applying, take stock of your finances to ensure you present the best possible picture to potential lenders.
Step 4: Organize Your Documents
Prepare necessary documentation such as proof of income, current mortgage details, and any other financial statements. Having these at hand will expedite the application process.
Step 5: Understand Your Home Equity
Knowing the amount of equity you have in your home is crucial. It affects your loan-to-value ratio, a key factor that lenders consider when evaluating your application.
Step 6: Consult Your Current Lender
Your existing lender might offer favorable terms for refinancing. It’s worth starting the conversation there before looking elsewhere.
Step 7: Shop Around
Don’t settle for the first offer. Compare rates and terms from multiple lenders to ensure you’re getting the best deal possible. Decide if you want a home equity loan or a home equity line of credit (HELOC).
Step 8: Apply for the Refinance
Once you’ve chosen a lender, complete the application process. Be prepared for additional information requests and possible negotiations.
Step 9: Continue Your Current Payments
While your application is being processed, maintain your current mortgage payments. Any lapse could negatively impact your credit score and loan terms.
How Does Refinancing Your First Mortgage Work When You Have a Second?
When you’re refinancing your mortgage, your second mortgage is legally allowed to be promoted into the primary position. If you end up defaulting on your existing mortgage’s monthly payment and having your home repossessed, the second mortgage lender will get your home. Any lender handling your refinance won’t agree to this.
So, before you can refinance your first existing mortgage, you have to get the second mortgage lender to agree to stay in the subordinate position, even after the refinance. The new mortgage lender can then take over the primary position.
Beware—resubordination is not easy to achieve. In order to make it happen, there are a few requirements:
- You must be up to date with all your current mortgage payments
- You may not use your primary mortgage as security to take out cash or consolidate debt
- You will have to pay certain fees associated with resubordination
What if Resubordination Doesn’t Work?
A second mortgage refinance may not work for everyone, so they may turn to resubordination. If your lender does not agree to resubordination, you still have a few more options. One might be trying to negotiate with the lender or loan officer. In some cases, threatening to leave and switch to another lender may do the trick! If that doesn’t work, follow through and try your luck with a new lender. That new lender may have different policies and be happy to agree to a resubordination.
If the bank or credit union denies your request for resubordination, you can try to pay off the full loan amount of your second mortgage with another loan instead of refinancing. Sometimes banks and credit unions will propose a package—refinancing the first mortgage alongside offering a large enough refinance loan to pay off the second mortgage loan.
Sometimes this is a great solution. But it’s not a good idea for all people in all circumstances.
If you do try to pay off your second mortgage with a conventional loan instead of refinancing, pay close attention to the loan term. Don’t get so swept up in the excitement of refinancing that you ignore the details. Remember, you are essentially applying for a brand-new refinance loan on top of your primary mortgage loan, so you need to make sure that everything is favorable to you.
If your second mortgage loan has a fairly low balance, taking on a new home loan may not make a lot of sense. On the other hand, if your second mortgage has a higher interest rate, taking out a loan to pay it off might be a great idea, so your interest payments don’t accumulate.
The Sale-Leaseback Option
There is another option out there for people who decide against refinancing their original mortgage or consolidating their loans. A sale-leaseback program allows you to sell your home and then keep right on living in it. The result? You can convert your home equity to cash, and afterward, you’ll still go on living in your own home.
With a sale-leaseback program, there are typically no minimum income requirements and no credit checks that typically come with other alternatives like a home equity line of credit (HELOC) or home equity loan. The whole process moves along quickly, and the application process is easy and fast.
Through sale-leaseback options, you can also get the money you need now by using equity to buy a second home or use the money however you’d like. There’s no need for refinancing your second mortgage. Once you are able to convert your home equity funds, you can use them for whatever you need. It’s like your own personal loan, but better because it’s your money. Some customers put their home equity funds towards starting a new business. Others use them to put a family member through college. The possibilities are limitless.
If you’re looking at refinancing a second mortgage, you may face strict terms that aren’t always favorable to you. Talk to a financial consultant to decide if a second mortgage refinance could be a good option for you.