How to refinance when you have a second mortgage

Two loans make a refinance challenging but not impossible

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Refinancing your mortgage is a great way to get better loan terms and possibly a lower interest rate. But if you have a second mortgage on your home — such as a home equity loan — refinancing is a bit more complex.

While it’s easy to refinance your second mortgage, refinancing your primary mortgage while you have a second mortgage in place requires a few extra steps.

We’ll walk you through the refinancing process when you have a second mortgage and cover what to watch out for.


Key insights:

  • Refinancing your primary mortgage is more complicated with a second mortgage in place.
  • You need to work with your primary and secondary mortgage lenders to refinance the primary home mortgage.
  • You’ll need to file for resubordination, which can be denied.

Understanding second mortgages

While most homes have a primary mortgage used to purchase them, you may also have a second mortgage from borrowing against the equity in your home. There are several types of second mortgages, including:

  • Piggyback loans: A piggyback loan is a second loan that helps cover part of the down payment on your home.
  • Home equity lines of credit (HELOCs): A HELOC is a revolving line of credit that borrows against the equity in your home.
  • Home equity loans: A home equity loan is an installment loan that borrows against the equity in your home.

Second mortgages typically fund home improvements or consolidate high-interest debts. They can also help purchase another home by borrowing for a down payment on a vacation home or rental property.

» MORE: What is a HELOC, and how does it work?

Understanding refinancing

Refinancing your mortgage means applying for a new home loan to replace your current loan. The new loan may have a lower interest rate or better terms and can help you save money.

Refinancing can be a great way to pay off high-interest debt, borrow money for home improvement projects or simply lower your monthly payment. There are several types of mortgage refinancing products, including:

  • Rate-and-term refinancing: A home loan that lowers your interest rate or changes your loan term length (or both). This can help you lower your monthly payments or shorten your loan payoff.
  • Cash-out refinancing: Allows you to finance a larger amount than your current home loan balance and use the extra cash for debt payoff, home improvement or other needs.

Refinancing with a second mortgage

It’s possible to refinance your primary mortgage, second mortgage or both, but the process differs for each type of refinance. Here’s how to refinance with a second mortgage:

Refinancing your primary mortgage
“Refinancing when you have a second mortgage can present some hurdles. These roadblocks often revolve around the fact that your second mortgage lender has to agree to remain in second position behind your new refinance loan. This process, known as subordination, can cause delays and complications,” said David A. Krebs, the principal broker at DAK Mortgage in Miami.

This means that if you default on your mortgage, the “primary” lender has the first claim to recoup its costs. The secondary lender gets whatever is left. Essentially, the second mortgage is subordinate to the primary mortgage.

But when you want to refinance your primary mortgage, and there’s a second mortgage in place, you’ll need to work with the secondary lender to agree to resubordination. This allows the newly refinanced first mortgage to maintain the first claim in the event of a default.

If the lender is the same for both mortgages, this should be a straightforward process. But if the lender for your second mortgage differs from the primary lender, you or your primary lender will need to submit subordination documentation for the secondary lender to complete. This typically comes with fees and may take a few weeks to process.

Refinancing your secondary mortgage
You can refinance your secondary mortgage without any extra agreements in place, as the secondary lender is already subordinate to the primary mortgage. This means you can apply for and complete a mortgage refinance, and the second mortgage lender will still be second in line to claim in case of a default.
Refinancing your primary and secondary mortgages
If you want to refinance your primary and secondary mortgages, you can consolidate them into a single loan. But most mortgages have a waiting period before they’re eligible for a refinance. If your primary or secondary mortgage is still within its waiting period, you can’t refinance until after the specified amount of time has passed.

You should also consider the amount of home equity you have when looking to consolidate both mortgages. If you don’t have at least 20% home equity after accounting for both mortgages, the new (consolidated) mortgage may be subject to private mortgage insurance (PMI) .

Pros and cons of refinancing

Refinancing your primary mortgage when you have a second mortgage in place can be a good idea, but it’s also a more involved process than refinancing with only one mortgage. Here are a few pros and cons of refinancing with a second mortgage:

Pros

  • It can reduce your monthly payment.
  • It can consolidate both mortgages into one.
  • It can lock in a fixed interest rate.

Cons

  • It might require filing for resubordination.
  • There may be extra fees when refinancing with a second mortgage.
  • You might end up paying for PMI.

Should you refinance with a second mortgage?

Refinancing can make sense for many homeowners, even if they have a second mortgage. Here are a few reasons to consider refinancing:

  • Refinancing may reduce your interest rate.
  • Refinancing may reduce your monthly payments.
  • Refinancing may shorten your loan term.
  • You can use a refinance to switch from an adjustable-rate mortgage to a fixed-rate mortgage.
  • A cash-out refinance can be used to pay off high-interest debt.

But refinancing isn’t always a great option, and with lender fees and associated loan costs, it can end up costing you more money than you save. It’s important to always run the numbers to make sure a refinance makes sense for your situation.

» MORE: Complete checklist of mortgage refinance requirements

“What if my refinance is denied?”

If you try to refinance your primary loan while you hold a second mortgage, your refinance may be denied. A refinance can be denied for a few different reasons: Your credit profile might be weak, your debt-to-income ratio might be too high, or your secondary lender might not approve the resubordination request.

Here are a few things you can do if that happens:

  • Pay off your secondary loan. If the secondary lender refuses resubordination or you can’t qualify for a refinance with both loans in place, consider paying off your second mortgage. This may allow you to refinance and avoid mortgage insurance if you keep your home equity above the 20% threshold.
  • Refinance both loans. If your secondary lender doesn’t approve resubordination or you simply don’t qualify for a refinance with a second mortgage, you may be able to consolidate both loans into a single refinanced loan.

View rates from leading lenders now.

    FAQ

    Does refinancing affect your credit score?

    Refinancing your mortgage can affect your credit score. When you apply for a refinance, the lender performs a hard inquiry on your credit, which can cause a temporary dip in your score. But hard inquiries usually only affect your credit score for around one year.

    Can I refinance if I have bad credit?

    Yes, you can refinance if you have bad credit. However, don’t expect the best rates or loan terms. Your credit score is one of the primary factors in getting approved for a mortgage refinance, and the lower your score, the higher your rates may be. There are some loan options, such as the streamline refinance offered by the Federal Housing Administration (FHA), that don’t require a credit check or income verification. But you must have an existing FHA loan in place to apply.

    Can I roll my second mortgage into my first?

    You can consolidate your first and second mortgages into a single mortgage with a mortgage refinance. You must simply take out a new loan that covers the balance of both loans, and the new loan becomes a single primary loan for your home. But you may have to pay for private mortgage insurance (PMI) if you borrow more than 80% of the current value of your home.

    Are there tax implications with refinancing a mortgage?

    There can be tax implications with a mortgage refinance, depending on the loan type and how you file your taxes. Mortgage interest and points paid on a mortgage refinance may be deductible as itemized deductions. But you can’t deduct mortgage interest payments on a cash-out refinance if you didn’t use the refinance funds to substantially improve your home.

    Bottom line

    Refinancing your primary mortgage when there’s a second mortgage on your property can be a bit complicated. You’ll need to work with both lenders to ensure you are eligible to refinance your mortgage. Several options are available for refinancing one or both mortgages. However, it’s important to run the numbers to ensure a mortgage refinance is worth the cost.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Fannie Mae, " What are the resubordination requirements for refinance transactions? " Accessed June 13, 2023.
    2. Consumer Financial Protection Bureau, " What is private mortgage insurance? " Accessed June 13, 2023.
    3. IRS, " Publication 936 (2022), Home Mortgage Interest Deduction ." Accessed June 13, 2023.
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