Second mortgages typically are only approved if you show sufficient income to manage the payment and the property in question has equity. The amount of a second mortgage usually is equal to or less than the difference between what you owe on your first mortgage and the market value of the property. Refinancing a second mortgage can save you a significant amount in interest.
Second mortgages are available in two forms: home equity loans and home equity lines of credit. Both are secured by the value of your home with the understanding that the primary mortgage takes precedence and will be paid in full first if the home is sold. Because of this order of importance, many homeowners refinance their primary mortgage first, and include the second mortgage in the bundle. Some homeowners use extra cash from the refinance of their first mortgage to pay off the second if the remaining balance on the loan is low enough to make it a practical move.
The reason for a second mortgage refinance is savings. Many times the rate you receive for a second mortgage is higher than what you're paying for a primary mortgage. This is because of the risk the secondary lender is taking on a property that may fall in value and leave the homeowner underwater with both loans. Since the first mortgage lender is entitled to a full payoff before the secondary lender sees any money at all, the terms of the second mortgage are understandably different. Once the loans have been paid down a bit, some of the risk is alleviated and a lower rate may become available.
Roll Them Together
Second mortgages can be refinanced on their own, or rolled together with your primary mortgage and transformed into one larger loan. This eliminates the need for two loans, two payments and two sets of terms. If your home value has risen since the loans were initiated, and you have access to an interest rate at least 2 points lower than the current one you're paying, it may make sense to roll your first and second mortgages together into a single refinanced loan. Income also can be a determining factor in this situation. If your second mortgage principal is less than half your yearly income, you will save big by paying it off rather than refinancing. If it is more, rolling your two loans together likely will be more financially beneficial.
The biggest issues when refinancing a second mortgage, besides getting approved, are the fees and charges associated with the process. A refinance is essentially the creation of a new loan with new terms and a new rate. There are loan origination fees, an application fee and points to pay, and if you plan on paying off the loan with a lump sum sometime in the future, you can expect to shell out an early termination fee for the privilege. The closing that took place the first time around will have to be repeated, along with all the fees that come with it. Even if the rates are lower on your refinanced loan, the upfront costs can be prohibitive at 3 to 6 percent of the total principal.
- The Federal Reserve Board: Home Equity Lines of Credit
- Zillow: Home Equity Loans: Information and FAQ
- Mortgage Professor: Refinancing and Second Mortgages
- Federal Reserve Board: A Consumer's Guide to Mortgage Refinancings
- Dave Ramsey: Is a Mortgage Refinance Right for You?
- Bank Rate: Can You Refinance Home Equity Loans?
- Realtor: Second Mortgage
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.