If you tapped your home equity to borrow money for a new car or to remodel your kitchen, you now have two monthly mortgage payments to contend with. If interest rates drop, you can refinance both your primary and secondary loans at the same time. However, a number of factors can complicate the equation; these range from your home's value to your creditors' willingness to play ball.
You could really simplify your financial situation by refinancing your two loans into one. Generally, lenders allow you to borrow 80 percent of your home's value in the form of a first mortgage. If you can pay off both your existing loans without exceeding the 80 percent cap then you can certainly save some money since first mortgage rates are lower than rates on second lien loans. If you do not have enough equity to roll both your loans into one, your lender may allow you to go past the 80 percent mark if you agree to buy private mortgage insurance. This covers your lender's losses if you default on the loan. Compare the cost of the loan including PMI to your current payments before you make the switch.
If you want to avoid the cost of PMI but have less than 20 percent equity in your home, try to refinance both your loans with one lender. Refinancing both loans with one lender makes things easier logistically since you can attend one closing session and provide the lender with one set of income verification documents. The new loans should also have the same payment date, which means you can more easily keep track of your payments. However, some lenders do not offer second lien loans while others charge high interest rates on these products.
In the mortgage world, lien positions are of paramount importance. A lien represents a creditor's interest in your home. If you default on your mortgage, the lien holder presses its claim on your property and sells you house to raise funds to settle the debt. Liens are based on seniority, which means that the first creditor to file a lien has the first claim on your home. This matters because foreclosure sales sometimes fail to raise enough cash to cover both loans. Lenders are often unwilling to approve simultaneous closings involving two financial firms because the second lien holder could potentially file its lien before the first lien holder. First lien mortgage rates are low because the lien holder should have the first claim on your home. Good luck with finding two lenders willing to agree to a simultaneous closing.
If your primary lender does not offer second lien loans and you cannot find two lenders who will work together, then you are out of luck when it comes to refinancing your second lien. You can still refinance your first lien if your existing second lien lender signs a subordination agreement. This document gives the new first lien holder permission to bump the existing second lien down the chain. If you have a lot of equity in your home and good credit, your second lien holder may agree to this. If house prices in your area are falling like dominoes, do not expect a lien holder to agree to such a deal.
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