Can I Refinance My Second Mortgage?

Can I refinance my second mortgage?

3 Answers

The best answer to give you based on the information given is maybe.  Depending on your overall LTV( Loan To Value)  there are still a few lenders willing to refinance second mortgages, either as a closed end(fixed rate) mortgage or as a HELOC(Home Equity Line of Credit) which would be a variable rate based on the prime rate. Most investors of second mortgages will not go above 80-85% CLTV(combined LTV, first and second mortgage) so depending on how much you owe versus how much the property is worth, should give you a good idea as to whether you can refinance your second or not.  Keep in mind this has not taken into consideration your overall debt to income/time on the job/disposable income or other key pieces of the approval process.  In today's market, getting a second mortgage done is almost as difficult, if not more difficult than getting the first mortgage done as it is a more risky investment for the lender, should the property ever go into foreclosure, the taxes and the first mortgage would be paid prior to the second mortgage lien holder.  Good luck

Second mortgages typically have higher interest rates because in the event of a default, the second mortgage will not receive payment from the home's value until the first mortgage is paid off.  Therefore, a second mortgage is riskier.

There are three good reasons to refinance.

  1. To lower your monthly payments.

2.  Take cash out of your property.

3.  Pay off your mortgage faster.

Refinancing can be great for some owners and not for others.  Right now is a great time to refinance due to low interest rates, but the decision to refinance depends on how much you owe on the property, how much it's worth, and how long you plan on keeping the property. (Most refinance loan programs require at least 10% equity in your home to refinance) If you already have a relatively low interest rate, it may cost you more in the long run to refinance than it would to just stay where you are.  It may help to use a mortgage calculator to determine whether or not it's worth it for you to refinance your second home.  You need to consider the cost in refinancing, type of loan and whether or not you will be keeping the property long-term. 

Before starting the process, you'll want to know what your credit score is.  If there is anything on your credit report that isn't accurate, it's a good idea to dispute those items with the credit bureau's before attempting to refinance.  This could increase your FICO score and help you get a better rate.  You'll also want to make sure you have money set aside for closing costs.  Closing costs can cost around 2%-3% of your loan amount.  Check to see if you have a pre-payment penalty.  If so, this will be added to closing costs.  Make sure you shop around for the best rates and lenders.  Some lenders will wave some routine refinance charges like application, appraisal and legal fees.  Try to avoid second mortgages that include penalites for late payments and default.  By shopping around, you can find the most competative rates.

Another option is to roll what you have left over on your second mortgage into your first. Again, this may not be the best option for everyone.  Usually, it must have been 12 months since you've secured your second mortgage and still have 10% equity in your home.

Applying to refinance your second mortgage is similar to applying to refinance your first: You must submit a full application with requested documentation to a lender that offers second mortgages on your type of property in your area. The lender will determine whether your credit, income, and home meet their guidelines, and they will either extend or deny you credit (a refinance) based on their findings.

Refinancing your second may be more difficult than your first, though, in an area where home values are falling or have fallen. The list of lenders that are willing to extend second mortgages to homeonwers has shrunk considerably in recent years, and if you owe more than 80-90% of your home's current value (both loans combined), there may be very few lenders (if any) that offer a refinance product for second loans.

When a lender is in "second" position(or third or fourth for that matter), their position is inherently riskier than that of the first lender. If you were to stop making payments and the home needed to be sold or foreclosed, the second lender would only receive renumeration AFTER the first lender was paid in full. In many cases, there is nothing left after a distressed sale and attorney costs from the first lender - and the second lender loses everything or nearly everything. Additionally, should you stop paying the second lender but continue to pay the first on time, the second mortgage holder would have to jump through some additional hoops to try to recover their losses while the first lender has no inclination to change a thing.

Your best bet would be to talk to an experienced, independent mortgage broker or lender (or several) in your area about second loan options. In my area (New England), the most generous/lenient "second mortgage" lenders are the local ones - wholesale brokers, correspondents, or community banks and credit unions. When a lender is headquartered in or near your neighborhood and is very familiar with the area, they may be more willing to be in riskier "second" position - that is, offer you a second mortgage.

You may also be successful in talking to your current second mortgage lender - in theory, they are already in the risky second position, so they may be willing to offer you a safer loan that more firmly secures both your position and theirs going forward.