You have no equity in your home and two mortgage loans, something you'd like to change. You can combine your first and second mortgage loans into one loan with one payment through a refinance. But refinancing your mortgage loan when you are at a loan-to-value rate of 100 percent -- meaning you owe as much on your mortgage loan as what your home is worth -- is already a challenging task. Doing this while trying to combine two mortgage loans into one can be even trickier, but you might be able to pull off this kind of refinance by working closely with your mortgage lender.
TL;DR (Too Long; Didn't Read)
When you attempt to combine a primary and secondary mortgage, you're going to have a hard time getting approved if the mortgages have a 100% LTV. This is because most lenders require borrowers to have at least 20% equity in their homes. Of course, there are always a few lenders who are willing to do this for the right candidate. Typically, this person would have an excellent credit score and a stellar history of making their mortgage payments on time.
Be Aware of Equity Challenges
Most mortgage lenders require that homeowners have at least 20 percent equity in their homes before they'll approve them for a refinance. If you have a loan-to-value ratio of 100 percent, you're already facing a challenging refinance. That's because you don't have 20 percent equity. You have no equity at all. When you add the challenge of trying to refinance a first and second mortgage loan -- your second loan can be a home equity loan, true second mortgage or home equity line of credit -- into one single loan at 100 percent LTV, you are truly taking on a difficult task.
Subordination Plays a Role
Whenever you have a second mortgage loan, you'll need the holder of that loan during a refinance to give you permission to keep the loan in a subordinate position. That sounds more complicated than it is. If you default on your loan and lose your home to foreclosure, the holder of your larger primary mortgage loan gets paid first from the proceeds of this sale. If there is any money left over, the holder of the mortgage in a second -- or subordinate -- position gets paid next.
When you refinance a first and second loan, your primary lender will ask that the holder of your second loan agree to remain in its current, subordinate, position. If the second lender does not agree to this, you will not be able to refinance both mortgage loans, whether or not you are at 100 percent LTV.
Options Worth Trying
You can call around to any mortgage lender licensed to do business in your state -- not just the lender to whom you already send your mortgage payments -- to determine if any of them are willing to combine your first and second mortgage loans through a refinance even if you have no equity. Most lenders won't do this. But if you have strong credit -- most lenders today consider a good credit score to be 740 or higher -- a steady stream of income and a low debt-to-income ratio, you might be able to convince a lender that you are worth the risk of a no-equity refinance.
One at a Time?
If you find that you can't combine your first and second mortgages into one loan, you might still be able to refinance your primary loan to at least take advantage of the lower interest rates and resulting lower monthly payment that can come with a refinance. You might also find that if you take your second mortgage out of the equation you'll have 20 percent equity or more if you simply refinance your first mortgage, something that will make the refinance process an easier task.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.