How to Refinance a Second Mortgage
Can You Refinance a Second Mortgage?
It is possible to refinance a second mortgage. However, these loans are considered riskier because they are a second lien after your first mortgage. And that means they carry higher interest rates.
For this reason, many homeowners looking to refinance a second mortgage roll their home equity loan, or HELOC, into their first mortgage via a payoff refinance. This could potentially lower the interest rate and eliminate a second monthly payment.
Do you want to refinance a second mortgage? Research refi options and interest rates to see what works best in your situation.
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Understand second mortgages
A second mortgage is an additional loan secured by the value of your home that does not affect your first (primary) mortgage loan. Borrowers can use a second mortgage to tap into their home equity without changing the interest rate or term of their existing mortgage.
“A second mortgage is subordinated funding with a secondary lien to a primary mortgage loan,” said JD Dinnocenzo, vice president of Family First Funding in Delray Beach, Fla. “Second lien position” means that the second mortgagee would be paid according to the first mortgage lender in the event of foreclosure.
There are two common types of second mortgage loans:
- A home loan
- A home equity line of credit (HELOC)
You can also have a second mortgage if you used a piggyback loan to supplement your down payment and avoid private mortgage insurance (PMI) when you bought your home.
Many borrowers who take out a second mortgage loan choose to keep it and pay it off in full over their repayment period. Others choose to refinance from their second mortgage or into a new one with a lower interest rate or higher balance.
If you want to refinance – or are refinancing – your second mortgage out of of it – here’s what you should know.
Reasons to Refinance a Second Mortgage
According to experts, homeowners typically refinance second mortgages for one of four reasons:
- To get a lower second mortgage rate and monthly payment
- To borrow more money from their home
- To switch from a variable rate loan to a fixed rate loan and avoid interest rate hikes
- To turn their second mortgage into their first mortgage
“Let’s say you have a second mortgage with a fixed rate and a monthly payment of $500. If you can refinance that second mortgage and get a lower $300 payment by setting a lower interest rate, refinancing makes sense,” notes Jason Gelios, a southeast Michigan real estate agent.
Realtor Bill Gassett, founder of Maximum Real Estate Exposure, says there are other times when refinancing a second mortgage makes sense.
“Suppose the value of your property and equity has increased. You can refinance your second mortgage to borrow more money if needed. Keep in mind that the amount of money you can borrow depends on how much equity you have in your home,” Gassett explains. “Or if you currently have a second adjustable-rate mortgage loan, it might be worth refinancing into a second fixed-rate mortgage loan, especially if rates are likely to rise.”
Keep in mind that a second mortgage is considered a more expensive loan because it typically has a higher interest rate than a primary mortgage loan.
“That’s why many homeowners refinance their first and second mortgages into a new loan. It usually makes sense and can lower the overall monthly rent for the property,” Dinnocenzo continues.
Who Should Refinance a Second Mortgage??
It may be worth refinancing your second mortgage if you can either save money on the existing loan or borrow additional funds from your home.
“These funds may be used for any purpose you see fit, e.g. For example, making repairs around the house or helping your child with college costs,” says Gelios.
If you have a first and second mortgage and your total balance is less than 80% of your home’s value, it may also be wise to combine both mortgages into one loan to lower your total principal and interest payments.
“However, if your loan balances are over 80%, combining a first and second mortgage may not always make sense. That’s because in this scenario, you need to take out private mortgage insurance that protects the lender in the event of a default by you as the borrower,” adds Dinnocenzo.
In addition, interest rates have risen from their historic lows in 2020 and 2021. So if you already have an extremely low interest rate from the past few years, it may not make sense to refinance at today’s higher interest rates. But that depends on your specific situation.
Second mortgage refinancing options
The most common way to refinance a second mortgage is to combine your first and second mortgage loans into a new primary home loan. This involves using a payoff refinance on your primary mortgage to pay off your second mortgage, resulting in a single loan and single monthly payment.
“Given that the second mortgage carries higher interest rates, it almost always makes sense to pay it off by refinancing the first mortgage. When you do a payoff refinance to pay off a second mortgage, you transfer the balance of the second mortgage to the first mortgage and take advantage of a more attractive interest rate,” explains Gelios.
“Just remember that if you want to avoid paying private mortgage insurance on your refinanced loan, it’s important to keep the total loan amount at or below 80% of the home value,” Dinnocenzo suggests.
Or, as mentioned earlier, you can just refinance your second mortgage loan into a new second mortgage loan, preferably one that offers a lower interest rate, lower monthly payments, a shorter loan term, or a larger loan amount that can fund your financial goals.
Steps to refinance a second mortgage
As with refinancing a primary mortgage, refinancing a secondary mortgage involves several steps. You must fill out a loan application, provide proof of income and assets, and have your creditworthiness and income checked carefully. “A mortgage insurer will review the paperwork that you submitted to your loan officer,” says Dinnocenzo.
You will also likely have to pay for a new home appraisal. Once you are approved, your lender schedules a loan close.
Note that refinancing a second mortgage can be more difficult than refinancing a first mortgage.
“That’s because second loans are considered higher-risk loans. As such, you may need to have sufficient equity in your home and a great credit history to qualify for a lower interest rate,” said Max Benz, founder and CEO of BankingGeek. “Also, closing costs for a second mortgage refinance can be higher, so be sure to factor that into your decision.”
Refinance Second Mortgage: FAQ
Yes. However, your second mortgage lender must agree to remain in the position of second lien. This is referred to as “subordination,” according to JD Dinnocenzo with Family First Funding. And it can make refinancing with a second mortgage more difficult than refinancing without.
Yes. A piggyback loan is just another name for a second mortgage, and you’re allowed to refinance any second mortgage. Some homeowners can refinance their piggyback loan by paying it into their primary mortgage through a payoff refinance.
Yes. You can combine your first and second mortgage loans into a new primary mortgage loan as long as your home has enough equity to cover both mortgages. Typically, you want your combined loan-to-value ratio (CLTV) to be below 80 percent for this strategy to work.
There are two ways to get rid of a second mortgage: either pay off the balance of the second mortgage, or refinance your first and second mortgages into a new principal loan.
Yes. If you are selling your home with a first and second mortgage, you must have paid off both mortgages at closing. It is not possible to sell a home if there are mortgages and liens on the property.
your next steps
Many homeowners use a cash-out refinance to combine their first mortgage and second mortgage into a single home loan. Others may choose to refinance just their second mortgage for a lower interest rate or additional cash back.
If you’re looking to refinance a second mortgage, talk to a mortgage lender about borrowing options and current interest rates. You can get started right here.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for the products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policies or position of Full Beaker, its officers, parent companies or affiliates.