Refinancing a first and second mortgage can be a bit easier when both loans come from the same lender. When you're dealing with two different lenders -- and if you're not refinancing into one new loan that pays both off both loans -- the lenders have conflicting agendas: both of them want to be paid first in the event of a foreclosure.
The money from a foreclosure sale pays off your debts in order of seniority. With a few exceptions -- property tax liens get paid ahead of everyone -- your first-mortgage lender is first to collect. With a refi, you typically pay off that mortgage and take out a new one. The trouble is, unless you take certain steps, that new loan would be considered "junior" to your second mortgage. No lender will refinance your loan unless the second-mortgage holder agrees to stay in the junior position.
If you have the cash to pay off your second mortgage before refinancing, that solves the problem. If not, you can look at refinancing with one mortgage, which will pay off both loans. A third option is simply to ask the second-mortgage lender to "subrogate" the loan, taking the junior position again. This makes sense, because the junior lender is no worse off than before -- and in fact, if refinancing lowers your monthly payments, you're less likely to default on either loan -- but some second-mortgage lenders may hang tight in hopes of a payoff.
If you have an underwater house, one where the mortgage is worth more than the property, it's even tougher to get a refi. Your second-mortgage lender isn't likely to subrogate if he knows foreclosure won't even cover the first mortgage. One solution is the federal Making Home Affordable initiative, which offers lenders incentives to refinance underwater homes, but it expires at the end of 2013. The Federal Housing Administration has a program for non-FHA mortgages that may allow you to refinance if your mortgage is 115 percent of your home's value, or less.
If refinancing to pay off both loans is an option, crunch some numbers first. Refis come with closing costs just like the original mortgage. You don't see the benefits of refinancing until the break-even point -- the point at which the monthly savings pay off those costs. Sit down and figure out the break-even point for your loan and ask yourself if you'll be in the house long enough to see that day arrive. If not, refinancing will be a net loss.
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