How to refinance a second mortgage

Can you refinance a second mortgage?

It is possible to refinance a second mortgage. However, these loans are considered riskier because they are a second lien after your first mortgage. And that means they carry higher interest rates.

For this reason, many homeowners looking to refinance a second mortgage end up converting their mortgage or HELOC into their first mortgage via cash refinance. This could potentially reduce the interest rate and eliminate a second monthly payment.

Are you looking to refinance a second mortgage? Read up on refi options and interest rates to see what will work best in your situation.


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Understanding second mortgages

A second mortgage is an additional loan secured by the value of your home that does not affect your first (primary) mortgage. Borrowers can use a second mortgage to leverage the equity in their home without changing the rate or term of their existing mortgage.

“A second mortgage is subordinate financing with a secondary lien position to a primary mortgage,” says JD Dinnocenzo, vice president of Family First Funding in Delray Beach, Florida. “Second lien position” means the second mortgage lender would be paid after the first mortgage lender in the event of foreclosure.

There are two common types of second mortgages:

  1. A home equity loan
  2. A home equity line of credit (HELOC)

You can also have a second mortgage if you used a piggyback loan to supplement your down payment and avoid private mortgage insurance (PMI) when you bought your home.

Many borrowers who take out a second mortgage choose to keep it and pay it off in full over their repayment term. Others choose to refinance their second mortgage or into a new one with a lower rate or a higher balance.

If you want to refinance your second mortgage — or refinance outside of it – here’s what you need to know.

Reasons to refinance a second mortgage

According to experts, homeowners typically refinance second mortgages for one of four reasons:

  1. To get a lower second mortgage rate and monthly payment
  2. To borrow more money against the equity in their home
  3. To switch from an adjustable-rate loan to a fixed-rate loan and avoid rate increases
  4. To convert their second mortgage into a first mortgage

“Let’s say you have a second fixed rate mortgage with a payment of $500 per month. If you can refinance that second mortgage and receive a lower $300 payment by locking in a lower interest rate, it makes sense to refinance,” notes Jason Geliosa real estate agent in southeast Michigan.

Real estate agent Bill Gassetthe founder of Maximum Real Estate Exposure, says there are other times when refinancing a second mortgage makes sense.

“Suppose the value of your property and capital has increased. You can choose to refinance your second mortgage to take out more money if needed. Remember, the amount of money you can borrow is tied to the equity in your home,” says Gassett. “Or, if you currently have a second variable rate mortgage, it might be worth refinancing into a second fixed rate mortgage, especially if interest rates are expected to rise.”

Keep in mind that a second mortgage is considered a more expensive loan because it usually has a higher interest rate than a primary mortgage.

“That’s why many homeowners actually refinance their first and second mortgages into one new loan. This usually makes sense and can lower their overall monthly housing payment,” Dinnocenzo continues.

Who should refinance a second mortgage?

It may be worth refinancing your second mortgage if you can either save money on the existing loan or borrow additional funds against the equity in your home.

“These funds could be used for whatever purpose you see fit, such as making repairs around the house or helping your child pay school fees,” says Gelios.

If you have a first and second mortgage and your combined balance is less than 80% of the value of your home, it may also be a good idea to combine the two mortgages into one loan to reduce your total principal payments and of interests.

“However, if your loan balances are over 80%, combining a first and second mortgage doesn’t always make sense. This is because you will have to pay for private mortgage insurance in this scenario, which protects the lender in the event of default on your part, the borrower,” Dinnocenzo adds.

Additionally, interest rates have risen from all-time lows in 2020 and 2021. So if you’ve already had an ultra-low rate for the past two years, it might not make sense to refinance. at today’s higher rates. But that will depend on your specific situation.

Second Mortgage Refinance Options

The most common way to refinance a second mortgage is to combine your first and second mortgages into one new main home loan. This involves using a cash refinance on your main mortgage to pay off your second mortgage, which results in a single loan and a single monthly payment.

“Since second mortgages come with higher interest rates, it almost always makes sense to pay them off by refinancing the first mortgage. When you refinance in cash to pay off a second mortgage, you transfer the balance of the second mortgage to the first mortgage and benefit from a more attractive interest rate,” says Gelios.

“Remember, it’s important to keep the total loan amount at 80% or less of the home’s value if you want to avoid paying private mortgage insurance on your refinanced loan,” Dinnocenzo suggests.

Or, as mentioned, you can refinance just your second mortgage into a new second mortgage, preferably one with a lower interest rate, lower monthly payments, shorter loan term, or larger loan that can fund your financial goals.

Steps to Refinance a Second Mortgage

Similar to refinancing a primary mortgage, refinancing a second mortgage involves several steps. You will need to complete a loan application, provide proof of income and assets, and have your credit and income checked thoroughly. “A mortgage underwriter will review the documentation you provided to your loan officer,” Dinnocenzo explains.

You will also likely have to pay for a new home appraisal. Once you are approved, your lender will schedule a loan closing.

Be aware that refinancing a second mortgage can be more difficult than refinancing a first mortgage.

“That’s because second loans are considered high-risk loans. As such, you may need to have sufficient equity in your home and excellent credit to qualify for a lower interest rate,” says Max Benz, Founder and CEO of BankingGeek. “Also, the closing costs of a second mortgage refinance may be higher, so be sure to factor that into your decision.”

Refinance the second mortgage: FAQs

Can you refinance your main mortgage while leaving a second mortgage intact?

Yes. However, your second mortgage lender must agree to remain in the second lien position. This is called “subordination,” according to JD Dinnocenzo with Family First Funding. And that can make refinancing with a second mortgage more difficult than refinancing without.

Can you refinance a piggyback loan?

Yes. A piggyback loan is just another name for a second mortgage, and you are allowed to refinance any second mortgage. Some homeowners can refinance their piggyback loan by integrating it into their main mortgage via a cash refinance.

Can you combine two mortgages into one?

Yes. You can combine your first and second mortgages into one new main mortgage, as long as your home has enough equity to cover both mortgages. Typically, you’ll want your combined loan-to-value (CLTV) ratio to be below 80% for this strategy to work.

How to get rid of a second mortgage?

There are two ways to eliminate a second mortgage: either pay off the balance of the second mortgage, or refinance your first and second mortgages into one new main loan.

Do I have to pay off my second mortgage when I sell my house?

Yes. When you sell your home with a first and second mortgage attached, you must have both mortgages paid off at closing. It is not possible to sell a house with a mortgage and an existing lien on the property.

Your next steps

Many homeowners use cash refinance to combine their first mortgage and second mortgage into one home loan. Others may choose to refinance only their second mortgage for a lower interest rate or additional cash back.

If you’re looking to refinance a second mortgage, talk to a mortgage lender about loan options and current interest rates. You can start here.

The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.

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