Refinancing a second mortgage, such as a home equity loan or a home equity line of credit (HELOC), is a common strategy for securing a lower interest rate. While replacing a second mortgage with another one is relatively straightforward, the process becomes more complex if you’re refinancing both your first and second mortgages simultaneously. Here’s a breakdown of how refinancing a second mortgage works.

What is a second mortgage?

A second mortgage is an additional loan taken out by a homeowner, with their property serving as collateral. This new loan is secured by the equity in the home.

When refinancing a second mortgage, or considering a refinance for your primary mortgage, it’s important to understand that the older loan has repayment priority. In the event of a default, the lender of the older loan is repaid first (e.g., if you sell your home). This repayment hierarchy is crucial to consider when refinancing both first and second mortgages.

Types of second mortgages

Here are three types of second mortgages:

  • Home Equity Loan: This option allows you to access a lump sum of money based on your home equity. You repay the loan with a fixed interest rate over a period of 5 to 30 years.
  • Home Equity Line of Credit (HELOC): A HELOC provides a revolving line of credit based on your home equity, typically available for 10 years. After the draw period, you repay the balance over 20 years, often with a variable interest rate.
  • Piggyback Mortgage: This type of mortgage helps cover a portion of the down payment on a home, enabling you to avoid private mortgage insurance (PMI) or a jumbo loan.

5 steps for refinancing your second mortgage

Refinancing a second mortgage is similar to refinancing any other type of loan. Follow these steps to navigate the process:

  1. Check Your Eligibility: Ensure you have sufficient home equity and a strong credit profile to qualify for refinancing.
  2. Determine Your Goals: Identify whether you want to lower your monthly payment, secure a lower interest rate, or achieve another financial objective. Your goal will help guide your loan search.
  3. Compare Lenders: Research different lenders and compare their loan offerings. Reading reviews and evaluating lender reputations can help you choose the best option for your needs.
  4. Apply: Complete your loan application and await approval. Be prepared to provide necessary financial documents and go through the full lending process, including home appraisals.
  5. Avoid Additional Loans: Refrain from applying for other credit or loans during the refinancing process, as changes to your credit profile can negatively impact your application.

Can you refinance a second mortgage?

The good news for borrowers is that refinancing a second mortgage is relatively straightforward. Since your second mortgage is already subordinate to your primary mortgage, refinancing it does not alter the priority order for lenders seeking claims against your home in the event of missed payments.

To refinance your second mortgage, you’ll need to meet standard mortgage criteria, including having adequate home equity, a strong credit score, and sufficient income to handle the new loan.

Pros and cons of refinancing your second mortgage

Before refinancing a second mortgage, weigh the pros and cons to determine if it’s the right choice for you.

Pros of refinancing a second mortgage

  • Lower Interest Rate: Potentially save money with a reduced interest rate.
  • Reduced Monthly Payments: Lower your payments by either lowering the rate or extending the term.
  • Fixed Rate Option: Switch from a variable rate to a fixed rate for more stable payments.

Cons of refinancing a second mortgage

  • Closing Costs: Be prepared for upfront costs associated with refinancing.
  • Higher Interest Rate: If market rates have increased or your credit score has decreased, you might face a higher rate.

Can you refinance your primary mortgage when you have a second mortgage?

Yes, refinancing your primary mortgage while you have a second mortgage is possible, but it can be complex.

Typically, the primary lender has the first claim if you default, while the second mortgage lender has a secondary claim. If you refinance your primary mortgage, the second mortgage will become the oldest loan, making the second lender the primary claim holder in case of foreclosure.

Many lenders are hesitant to accept this change. To refinance your primary mortgage, you’ll often need the second lender to agree to resubordination, which means they would revert to having a secondary claim if you default. Some lenders may refuse to agree to resubordination, and if they do agree, it often involves additional fees.

If you proceed with refinancing, your mortgage lender must submit a subordination package—containing all necessary documents—to the institution holding your second mortgage. The second mortgage lender will review the package, usually charging a few hundred dollars, and approval can take up to six weeks.

Options when resubordination is denied

If your home equity lender refuses to agree to resubordination but you still wish to refinance, one option is to pay off the second loan, either with your own resources or through a cash-out refinance.

However, if you opt for a cash-out refinance, you must maintain at least 20 percent equity in the property to avoid private mortgage insurance (PMI). The cost of PMI could diminish the savings from your refinance.

Additionally, taking on extra debt in your refinance could make lenders less inclined to approve your new loan, potentially resulting in a higher interest rate. Many lenders require a loan-to-value (LTV) ratio of 80 percent for a refinance, meaning the amount you borrow cannot exceed 80 percent of your home’s current appraised value.

Alternatively, you could seek a lender who offers both first and second mortgage refinancing simultaneously. This would allow you to refinance the primary mortgage while keeping the second mortgage in place. A mortgage broker might be able to assist you in finding a lender who offers this combined refinancing option.