Sometimes it makes more sense to pay off your primary mortgage first. Just be aware that if you make that choice, your second mortgage will, for all intents and purposes, become your primary. This means the second mortgage holder can swoop in and take your house if you fail to make your payments.
Reasons to Pay Your Primary First
There are a number of scenarios in which you would want to pay off your primary mortgage before your secondary loan. First, your primary mortgage might just expire before the second. If your first loan is for 10 years and your second is for 15, your first will be paid off five years sooner. Another common reason is that you may have gotten your primary mortgage under less favorable conditions. Perhaps your interest rate is too high or you are looking at an upward rate adjustment soon. If you have the cash to do it, it would be smart to get rid of that primary mortgage first.
The Payoff Process
When you want to pay off your loan, the first step is to request a payoff letter. This will give you the total amount of principal, interest and fees you need to scrape together to pay off the debt. Contact your lender and ask for a payoff good through a date of your choice. Make sure you ask for a per diem just in case you can't pay the loan on that day. If this is the case, you simply add the per diem to your payoff amount for each day after the payoff. For example. if you intend to pay the loan on Wednesday, but actually pay it on Friday, you will add two days of the per diem.
Once your first mortgage has gone the way of the dodo, your secondary mortgage jumps up to become your new primary. This is known as lien position. For example, you get Loan A in 2009 against your house. In 2011, you get a second loan, Loan B, without paying off Loan A. Loan A and Loan B both have a claim to your house, but Loan A has first priority. This means if Loan B wants to foreclose against your house, Loan A must be paid off first. Once Loan A is paid off, Loan B becomes priority. If you take out a new loan, Loan C, in 2012, Loan B still has first rights to your house.
Say you want to refinance your primary mortgage with another lender. This is certainly possible, but once you pay off your primary, your secondary loan will take first position. It doesn't matter that the new lender is paying off your first mortgage. In these cases, the new lender will require a subordination agreement. This is tricky, because your secondary mortgage holder has to agree to it. Basically, the second mortgage holder allows the new lender to pay off the primary mortgage and jump ahead into first position, leaving the second lender in a subordinate position.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.