Refinancing With A Second Mortgage Or Home Equity Loan

If you're looking into refinancing your home and have a second mortgage or a home equity loan or line of credit, in some cases you may be out of luck.

If you want to refinance your primary loan, you first must convince the lenders holding any second position loans to agree to continue to be in a subordinate position behind the new primary loan. This is called Subordination.

When the housing market was in an upswing, getting lenders holding second position loans to agree to subordination wasn't much of a problem. In many cases it wasn't even necessary to ask second position loans to be carried over because the home may have increased so much in value that the second mortgage or home equity loan could be paid off in the refinance. Even if a homeowner requested that a second position loan be carried over in subordination to a new primary loan, the home's increasing value made the lender much more likely to agree to a position of subordination.

With the current housing market, this is no longer the case. Secondary position lenders are now much less likely to agree to remain subordinate. Some will only agree to subordination if you first pay down the principal on the second position loan, which puts them in a better risk position.

In other cases, you may have no choice but to refinance your secondary loan. This is an option worth looking into, especially if it means a lower interest rate or a savings on your monthly secondary loan payment. The process of refinancing a secondary loan is essentially the same as refinancing your primary mortgage. If you choose this option, you'll need to shop around. Just be sure to talk to your mortgage professional and the new mortgage company about your desire to refinance your primary mortgage. If the new mortgage company for your secondary loan is no more agreeable to remaining subordinate in a primary mortgage refinance, you'll be back in the same position you started off at, if not worse.

If you are planning on refinancing your primary loan and have a second position loan such as a second mortgage, home equity loan or home equity line of credit, always be sure to contact the lenders for your second position loans first. They will take a look at your loan, the market in your area and your financial situation. They will then let you know if there are any changes that they will require in order to agree to subordination behind a new primary mortgage.

If you don't contact your second position lenders before attempting to refinance your primary mortgage, you may end up in an uncomfortable position once the secondary lender is informed of your pending refinance. Knowing in advance what your secondary lenders would require before agreeing to subordination rather than finding out when the refinance is in process will put you in a much better position. Having to stop a refinance in the middle of the process will end up being a waste of time, as well as a waste of money. You will still be responsible for paying for the refinance work that has already been done as well as any related fees that have been necessary up to the point where the refinance was stopped.

Be sure you know all of your responsibilities and options before you proceed with a refinance, especially if you have secondary position loans.