When you have two mortgages, refinancing just one can be difficult. When banks foreclose, liens -- claims on your property -- get paid off in the order they were filed. If you refinance, that lien would get paid off after the home equity loan you already have. Unless the two lenders can work around that, your refi probably won't happen.
The home equity loan won't be a problem if the lender agrees to subordinate his lien to the refi lender. Subordinating a lien moves the earlier loan behind the refi so that the refinanced mortgage gets paid first in foreclosure. The home equity lender usually charges the refi lender a fee to review the finances and decide if it's a good deal. If your home's worth enough that foreclosure could pay off both mortgages, the home-equity lender usually agrees to subordinate.
If your home is under water -- worth less than what you owe on the first mortgage -- your home equity lender may refuse to subordinate. Foreclosure won't pay off what you owe on the mortgage, so there's nothing left for the other loan. If the combined mortgage and home equity loan add up to more than 80 percent of your home value, you may not even find a lender interested in refinancing. That much debt puts you at high risk for default, which discourages banks from writing loans.
One solution if you're under water is the federal Home Affordable Refinance Program (HARP), which runs through the end of 2013. HARP offers incentives to lenders to refinance mortgages on under-water homes so that you can get a lower level of payments and hopefully avoid default. Federal officials say the country's largest lenders have agreed to subordinate second mortgages to HARP refinance. The program is only available if your loan is backed by the federal corporations Fannie Mae or Freddie Mac.
If you don't qualify for HARP or you can't convince your home equity lender to subordinate, you'll have to find another route to refinance. One solution is to pay off or pay down the home equity loan, then apply for the refi. Another, if your total debt isn't too high, is to take out a refinance mortgage that can pay off both the first and second mortgage. If neither is an option, you'll have to forgo refinancing for now.
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