Whether you want more affordable mortgage payments or would like to take advantage of lower mortgage rates, you might consider refinancing your first mortgage but leaving your home equity loan alone. Due to the concept of lien priority, however, refinancing just your first mortgage can be difficult and requires that the lender responsible for your home equity loan agrees to a process called resubordination. If your lenders can work out the agreement, you can usually refinance as long as you meet other requirements, such as those relating to your home's equity and your financial standing.
Refinancing only a first mortgage is possible if your home equity lender agrees to resubordination. This allows your refinanced mortgage to take the position before the old home equity loan.
Lien Priority and Refinancing
Each mortgage you take out on your property has a certain priority in the event you can't pay for your home anymore and the lender has to foreclose on it. When you take out a second mortgage, either a home equity loan or home equity line of credit, that loan takes second priority to your first mortgage since it has the later recording date. However, in the case where you decide to refinance just your first mortgage, that new loan will become second in priority to your existing home equity loan. This means that in the event of a foreclosure, the funds would go toward paying off the home equity loan before your refinanced mortgage.
This creates a problem for lenders since they want the primary mortgage to have the first lien position. After all, the lender wants to be sure they can get back enough money to pay your primary mortgage in the case of foreclosure. Therefore, a lender will normally deny you a refinance unless the position of the remaining home equity loan can be moved behind that of the new refinance loan.
Need for a Subordination Agreement
If you want to refinance your first mortgage but keep your home equity loan, the solution is to have the lender who holds the home equity loan agree to resubordination. With this agreement, your refinanced loan will have the first lien position, while your home equity loan will take the second position. This gives your primary lender assurance that they have the first claim during foreclosure.
Your home equity lender is under no requirement to accept a subordination agreement. For example, they may refuse if your property is underwater, meaning you owe more than it's currently worth, or if you don't have sufficient equity in your home to qualify for the refinance program. You might also run into problems when you want a cash-out refinance and plan to take out a larger loan than your original amount.
If your home equity lender does refuse, you'll likely not be able to move forward with a refinance and will need to consider some other options. However, if they approve, you can move forward as long as you meet the other qualifications for your chosen refinance program.
Qualifying to Refinance First Mortgage
Along with needing a subordination agreement, you'll need to have an acceptable credit score, meet debt-to-income requirements and have built up enough equity in your home for your lender to approve you for a refinance program. Lenders usually look for a credit score of at least 620, a maximum loan-to-value ratio of 80 percent and a maximum debt-to-income ratio of between 36 and 50 percent, but these figures can differ by program.
You'll need to submit financial documentation, such as proof of income, tax returns and bank statements, just as you did with your first mortgage. Subordination fees and loan closing costs usually also apply.
To determine if refinancing makes sense for you, check the current mortgage rates to see if they're lower than what you pay on your existing first mortgage. You can also use a refinance calculator to see how your monthly payments may change and if refinancing will actually save you enough money for the work involved.
Considering Your Alternatives
If your second mortgage lender just won't agree to resubordination, you might consider consolidating both your mortgages rather than keeping the home equity loan alongside a refinanced mortgage. You could also consider paying off your second mortgage if you have the funds since then it won't hinder you from a refinance. In a case where you need to reduce your first mortgage's payments temporarily, you could contact your lender and ask for any hardship programs available.
- Credit.com: Can Consolidating Your Mortgages Save You Money?
- LendingTree: How to Refinance an Underwater Mortgage
- PennyMac: Your Mortgage Refinancing Checklist: Ready to Refi?
- My Perfect Mortgage: Using a Subordination Agreement to Refi a First Mortgage While Keeping a Second
- NOLO: What's a Subordination Agreement?