If you have a first and second mortgage, you are in a little bit of a predicament when you want to refinance your first mortgage. Technically speaking, the second mortgage holder takes first lien position when you refinance the first mortgage. This is because the second lien holder originally promised to take second lien position after your original lender. Once that lender’s loan is paid off, the second mortgage holder can take the first position. In order to prevent that from happening and to allow you to refinance the primary mortgage on your home, you have to take the following steps.
You Need a Resubordination to Refinance your First Mortgage
The most crucial step in the entire process is to get the second lienholder to continue to stay in second lien position. The mortgage company that holds your second mortgage is already in a junior position, but they move up to a senior position if you ever pay off that first mortgage. Essentially, when you refinance your first mortgage, you pay it off. This puts the second lien in the first position.
In order to avoid this from happening, the new lender for your first mortgage will require you to secure a new subordination agreement from the company that holds your second mortgage. The lender will need to know all of the details of your new mortgage as well as the current value of your home. The lender handling your refinance can usually handle all of the details regarding what the second lienholder requires.
Obstacles to the Resubordination
There could be a few obstacles that could come up when you try to get the second mortgage holder to take the second position on your title. The following situations pose the greatest danger:
– Your combined outstanding principal between the first and second mortgage is too high compared to the value of your home
– The value of your home decreased too much since you originally took out the loans
– You have an open line of credit for the second mortgage
– The first mortgage is a risky program (such as an ARM)
There are ways around some of the obstacles, but not all of them. For example, if the second lienholder refuses to subordinate and you have the room in the value of your home, you can consolidate the first and second mortgage into one loan. This leaves no one to be subordinated and all loans are in one place making it easier on you.
If you have an open line of credit, you can close the line, making it a standard home equity loan that has regular payments due every month. This takes a level of risk away from the second lender, making them more likely to agree to subordinate again.
Last, but not least, you can opt for a less risky loan. If you refinance into an adjustable rate, the risk is higher that you will default in the future because you cannot predict the payments in the future. Instead, opt for a fixed rate loan that is predictable and less risky.
Refinance with the Same Lender
One way around the need to resubordinate your second mortgage is to refinance your first mortgage with the lender that holds your second mortgage. When this happens, there still needs to be an agreement to subordinate, but the lender is only competing with itself. This way if you were to default on the loan, the lender has a say in the proceeds of the home no matter what.
This is not always the way it needs to be, but if there is anything risky about your second mortgage that makes the lender not want to subordinate, it could be a good option for you.
If you wish to refinance your first mortgage and you have a home equity loan, it is not an impossible task. It will take a little more work and some more time, but it can be done. If you have a second mortgage, make sure to plan ahead accordingly when you want to refinance as there is no way to predict how long the second lienholder will take to agree to a subordination – sometimes it can take over a month. Start the process early and answer any requests right away to ensure that you are able to refinance in a timely manner.