Refinancing when you have an existing Second Mortgage or HELOC

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When you are refinancing your primary mortgage and you have an existing second mortgage or HELOC (home equity line of credit), the new lender will require to stay in “first lien position”. This boils down to who has first dibs on a property in the event of a foreclosure. Lien position is determined by the date the mortgage was recorded. When you refinance your first mortgage and you have an existing second mortgage, the new mortgage will have a recording date that is after the existing second mortgage. Technically, that would put the second mortgage or HELOC in “first lien” position, which would not be allowed with the new lender.

What are your options when you have a second mortgage and want to refinance? NOTE: please review your options with your mortgage professional before you take any action as there may be certain procedures that need to be followed in order to have a successful refinance. 

  1. Pay off and close the second mortgage with your own assets.
  2. Pay off and close the second mortgage with the refinance.  
  3. Restructure the mortgages with a simultaneous new first and new second mortgage. (Yes, piggy back second mortgages have returned).
  4. Request the second mortgage subordinate their lien position with the new first mortgage. 

Pay off and close the second mortgage with your own assets. This seems like a pretty straight forward solution assuming you (a) have the additional assets and (b) this is how you want to use those assets. Even if you have a “zero balance” on your HELOC, the lender may have to consider the full line of credit into your debt to income ratios (as if you have maxed out your credit line). If you do select this option, please do consult your mortgage originator.

Pay off and close the second mortgage with funds from the refinance. This may work assuming you have enough home equity to increase your loan amount to include the second mortgage with your refinance. If you obtained the second mortgage after you purchased your home, including it in the refinance creates a “cash out refinance” which has different guidelines and loan to value restrictions than a “rate term refinance”. If you are considering a HARP (Home Affordable Refinance Program) refinance, the second mortgage cannot be included in the refinance regardless of when it was acquired.

Restructure your mortgages with a new first and second mortgage (piggy back). Lenders are offering piggy back second mortgages again. If you have enough home equity, this may be an option to consider. The lenders I work with currently offer up to an combined maximum loan to value of 85% and you must have a 720 credit score or higher.

Request the second mortgage subordinate their lien position. If the above options are not available or appealing to you, the new lender will require that the second mortgage (or heloc) subordinate their lien position. This isn’t something that the second mortgage is required to do – it is up to the second mortgage lien holder IF they will allow the subordination to take place. With a subordination, the second mortgage still exist and the terms will remain the same (unless the second mortgage requires adjustments to the credit line).

This process generally does not take place until towards the end of the refinance process, when there is a loan approval with the new first mortgage, often times including an appraisal. The request is submitted to the second mortgage, often with a fee ranging from $100 – $300, for review. I have seen subordination request approved with no issues, approved with the HELOC being required to be paid down with the credit line reduced or closed and sometimes subordination request are not approved. It’s one of those situations where “we won’t know until we get there”.  Worse case scenario, a home owner could be out their deposits for the appraisal and request for subordination fees. 

If a home owner is refinancing with a Home Affordable Refi (HARP 2) and requiring a subordination, assuming their appraisal is waived, if the second lien holder denies the subordination, they’ve probably only lost their request for subordination fee (and time). It’s also possible that the second lien holder may require an appraisal to process the subordination even though the first mortgage (new HARP refi) is not requiring one.

I’m hoping that second mortgages will be more flexible, as are private mortgage insurance companies, with HARP 2 and allow more subordinations without appraisals. It only makes sense to allow the home owner to reduce their monthly payments which reduces the chance of foreclosure. However, banks don’t always do what is “common sense”. If you qualify for a HARP refi, and you do not have a waived appraisal during this phase, you may want to wait for the next release of expanded guidelines.  

If you are interested in refinancing your home located anywhere in Washington, please contact me, I’m happy to help you!  Click here for a HARP 2 rate quote and here for all other mortgage rate quotes.

Comments

  1. There is a major fault in the HARP program regarding a 2nd mortgage.

    Even if the 2nd lender is ready to subordinate their mortgage, HARP won’t approve you unless the 2nd mortgage is with a BANK. If you have a 2nd mortgage with anything other than a bank – for example, if you took a home improvement loan from a government branch – you can’t get approved by HARP even if they are ready to subordinate the 2nd mortgage!

    • Mendel, if the second mortgage is with a bank, credit union or mortgage company, HARP will allow the subordination. I’m not aware of HARP not allowing certain types of lenders – I would think that as long as the lender is willing to subordinate their lien position (recorded deed of trust) on the property, then the refi would be eligible for HARP.

      However, if ANY second lien holder refuses to subordinate their lien position to the new HARP refi, you have a “dead deal” unless the borrower pays off the second lien.

  2. I was finally approved for a Harp 2 refi but Sovereign bank wont subordinate to the new lender saying my LTV is too high. Huh??? This is the whole point of the Harp 2 and the only way I can refi due to a lower home value. They said I could choose foreclosure as an option instead. In that scenario they would get NOTHING since I am underwater on my first mortgage. Are banks this stupid? They’d rather foreclose than subordinate and have me keep paying.

    • Carrie, that’s unfortunate – have your loan officer contact Sovereign Bank to see if they will make an exception – make sure they understand this is a HARP refi.

      • Thanks for your reply
        We’ve already done that – – Sovereign said they dont agree to subordinations when the LTV is above a certain percentage. Isnt that the point of the HARP 2? They are still in second position regardless and the LTV remains the same. The point is banks need to be forced to subordinate for HARP 2’s when there is no other option – in my case I needed to save because I was downsized and took a job at a lower pay. Sovereign would rather foreclose than have me stay in my home and keep paying.
        I did write to the White House and to my Congressman but clearly we need a work around for second lien situations!

        • Carrie, we are in exactly the same position. Let me know if you find anything out.

          • I certainly will. I am devotong about 4 hours a day to try and find a work around solution here.
            Is your bank Sovereign as well?

          • My bank is Alostar. It appears as though they were in some part of the bank bailout and through Federal Restrictions (FDIC) they cannot subordinate or issue new loans. Carrie, my e-mail is adeshells@yahoo.com

  3. David Ruffing says:

    I am trying to refinance my mortgage, my credit score is very high and have only one problem with the bank. I have an heloc with the bank and they can’t come up with the note they are asking me to produce the note or I will default on the refi. What alternatives do I have,I thought it was the banks responsibility to produce the note.

    Thanks in advance
    David Ruffing

    • Hi David,
      Is your first and/or second mortgage with the bank you’re trying to refinance with? My clients typically do not have troubles obtaining a copy of their Note from the mortgage servicer. If the bank says they are not able to do this (really surprising!) then you can try the escrow company where you closed that loan. You should have received a copy of the Note when you closed on that loan and YES the bank should have a copy too.

      Good luck!

      • David Ruffing says:

        Rhonda,
        There was never a closing on the Heloc so to speak everything was done via fedex and a notary. The heloc was in 2004 during the time of robo signitures. My question is should I press the bank for a copy of the note and if they can’t produce it is the heloc valid?

        Thanks again,
        David Ruffing

        • HELOC’s often have “Agreements” instead of a “Note”.
          I’m not an attorney so I don’t know if your HELOC is valid or not. Did you ever use it?

          • David Ruffing says:

            I have used the heloc and recently varified that the bank has the proper paperwork. I do have another question regarding refinancing. The question is both I amd my wife have multiple sclerosis and are considering a reverse mortgage in a few years (aproximaely 7) would refinancing now have any affect on us in regard with a reverse motgage latter?

          • Hi David, refinancing could possibly impact the reverse mortgage since your amount of equity is factored into how much your reverse mortgage may be. If you’re refinancing just to reduce the rate/payment and not withdrawing any more home equity from your home, then the refi should not impact getting a reverse mortgage.

            Are you waiting for seven years due to the age requirement?

  4. David Ruffing says:

    Rhonda,
    I am 62 but my wife is seven years younger that’s why we have to wait. We don’t plan on using any more of the HELOC and are trying to take advantage of the lower rates. We don’t need income from a reverse mortgage but we like the idea of no house payment. We are fortunate and live outside of Washington D.C. where home prices didn’t drop drasticaly it’s a 2500 square foot rancher on one level perfect for our medical condition. In our case would both a refi and latter revese mortgage work?

    • Hi David, I recommend finding someone who specializes in reverse mortgages in your local area to review your current situation and perhaps develop a strategy.

      It’s hard for me to say if a reverse mortgage would work for you today or in seven years. There are variables as to how much the loan amount (loan to value) is allowed to be based on actuary tables and home equity.

      Plus, in seven years time, it’s possible the program may have many changes (or may not be around or be more restricted). HUD is already removing some of the available programs (I wrote about this recently).

  5. I purchased a home in 2006 with a 2nd piggyback mortgage to avoid PMI. In 2007 we refinanced as rates were lower and re-financed with both 1st and 2nd simultaneously however in hindsite I see it was a “cash out”. (Have since learned how much our mortgage broker was scum!)

    So now we are at 6.5% fixed on our 1st and 8.9% 15 yr balloon on our 2nd with a LTV ratio 87% approx. (We recently did an attic finish and are hoping this helps the LTV!)

    I want to get rid of the 2nd mortgage and was told to check HARP but read on your column how the 2nd won’t be considered.

    Needless to say I don’t have the cash to pay off the 2nd. Is it possible to get rid of the 2nd in our situation? Otherwise is it possible for me/myself to coordinate a re-fi with both?

    • Tamara,
      Actually, refinancing a second mortgage that was obtained when you purchased your home, it’s typically considered a rate-term refinance and not a cash-out refi IF you combine both the first and second mortgage. If you had to refi the first and second separately – I’m wondering if it was a loan-to-value issue at that time?

      I hate defending “scum” loan originators – sometimes I think it’s their fault for not communicating all options (perhaps it was your best option at that time?? I don’t know what your scenario was) and sometimes, they were greedy scum.

      Back to your comment, HARP will not allow the second mortgage to be included in the refi. If the first mortgage was securitized by Fannie Mae/Freddie Mac prior to June 1, 2009; then your first mortgage should qualify for HARP assuming the second mortgage will agree to “subordinate” their lien position (I’m finding that most second mortgages/helocs are being very cooperative with HARP refi’s). You should not have to pay off the second mortgage to do a HARP refi.

      Worse case, if the second mortgage refuses to subordinate, your options are to not proceed with the refi or to pay off the second mortgage (assuming you have the reserves to do so).

  6. Dear Rhonda,

    I have a HELOC and want to refinance but am told by first mortgage bank that I have to do a cash out refinance. I don’t have enough equity to make the loan to value ratio needed for the cash out refinance. Paying off my HELOC is going to take a while so I am concerned that I will miss an opportunity for a lower refi rate. I am currently at 5% with an FHA paying PMI. I have approx 79% loan to value on the first mortgage and a cumulative loan to value of 84% with the HELOC included. Also, I purchased my home in December 2009 so don’t qualify for a HARP. Any advice is greatly appreciated.

    • Hi Michi,
      Will the HELOC subordinate their lien position? Then your refinance should qualify as a “rate term” instead of a cash out refi.

      You may need to try another lender for your refi on the first unless your second mortgage/HELOC refused to subordinate. With the loan to values you reference, assuming your credit is good and you’ve paid your mortgages on time, they should be agreeable.

      Good luck!

  7. Hello,
    I am now in the process of a Harp refinance with Chase as the primary lender. My Heloc is with Regions.

    Regions agreed to subordinate but the they are amending the terms of the original Heloc by: changing the rate floor, freezing the line. I am concerned about a rate change.
    Val

  8. Pat Barnes says:

    I’m trying to refi and keep my second because it has a $125K max, a 20 year payout and rate is prime -.9% (currently 2.3%). Combined first and second I am at 57% LTV. Should the new lender be increasing my rate because of the subordination? They already bumped it from 2.75% to 3.25% because I only owe $102K on the first (+ $103K on the 2nd).

    • Hi Pat,

      When you say “new lender” I’m assuming you mean the proposed new first lien mortgage lender you’re refinancing with. If the new lender is changing your rate, they need to explain to you what is causing the price difference. If a GFE has been issued, they are required to provide you a “notice of changed circumstance” within 3 days of that change detailing the action that triggered the price change.

      Going from 2.75% to 3.25% is a huge jump.

      Possible changes that might cause this would include:
      -repricing the loan to have rebate pricing to credit towards reducing closing cost
      -having to lock for a longer period due to the time it takes the second lien holder to process the subordination
      -change in credit scores
      -your lender is pricing your loan as a cash out refi instead of a rate-term refi.

      If your lender cannot provide detailed satisfactory answers to why your rate has changed this dramatically, I would get a second opinion with a local licensed loan officer.

      Good luck!

  9. I am in process of refinancing my lst mortgage with HARP program. I have 2nd (home equity line with a pretty high balance). When I contacted my 2nd lien holder, they will agree to look at subordinate position, but say they don’t offer home equity lines at my current rate of 3.25%. I originally took this home equity line out in 2008 at prime + 0 (5% at time of application) and rates have since fallen to 3.25%. They would modify and increase my rate to 5% floor + 250.00 in fees. They say they currently offer home equity lines at prime plus 1. Can they do this? Doesn’t seem right to me.

    • Hi Kathy,
      I’ve heard of 2nd lien holders reducing the credit line but never increasing the rate. Unfortunately, they have the right to refuse to subordinate – it’s not something they “have” to do. The $250 ($150 – $300) in fees is pretty standard for the request for subordination. I believe they only way they “can” increase your rate is if you agree to their terms they are requiring to subordinate their lien position. If you don’t agree with their terms, they will not subordinate and you will not be able to do your HARP refi.

      I think it’s a pretty stinky move on the second lien holder’s part. It’s in their best interest to accommodate the HARP refi as it’s reducing your mortgage payments and making default less likely. Should you default on your mortgages, odds are, the second lien would be wiped out by the first in the event of a foreclosure (this is why the subordination is required by the first lien lender who’s doing your HARP refi).

      Good luck!

  10. Having a problem with finding the ‘recorded’ subordination agreement that was to filed when I did a refi in 2004. Currently trying to get help with my past due mort payments, and they are telling me that my HELOC is in first position and that nothing was filed putting my original mort in 1st position, WF insists they are in 1st, and neither my 1st or 2nd can find any paperwork putting WF in 1st.

    In 04 when the refi was done, it was with different lenders who are no longer in business (MIT, Tayler Bean & Whitaker), and it finally ended up with WF in 10/04. My 2nd had signed a sub agreement in 1/03 with MIT, who, it is recorded was paid off when it went to TBW. So, can I file chap 7 and strip WF (because there is nothing recorded legally they’re in 1st position)? What does lien stripping get me?

  11. Forest Stone says:

    Dear Rhonda,
    When I talked with the mortgage consultant in May and was told I can get the better rate comparing my current 30 year fix with 4.65%, so I agreed to proceeding of the refinance process with no closing cost, except I have to pay the appraisal fee.
    Now the refinance process has stopped due to the rates is keeping going up, but I paid the $500 appraisal fee already. And now the mortgage company asks me to pay the subordination fee $275, do you think that’s right? Should they wait for the first loan gets approved then to proceeding to do the subordination?
    Thanks!

    • Hi Forest,
      It sounds like your loan isn’t locked? If not, have the lender provide you with an updated quote to make sure that it makes sense to proceed with the refi BEFORE you pay the subordination fee. The subordination fee is charged by your second mortgage or HELOC and, just because ou’re paying the fee does not guarantee that they will subordinate the mortgage (which has to happen if your refi is going to be successful). Rates have been trending a lower this past week so please get an updated quote if you are not locked. Good luck!

      • Forest Stone says:

        Dear Rhonda,
        They did the subordination immediately without any good quote cause they thought it would take about 6 weeks or more to process but actually it only took two weeks, and now it’s expired and they closed my file since no more good quote as they said. They sent me an invoice for that fee. Is that fair?

        • I would contact a manager and let them know you don’t think it’s a fair charge. I don’t know your whole scenario – it can be relative whether or not it’s “fair”. You obviously do not feel it’s fair and that’s what matters.

  12. Hi,

    I am trying to help out a customer where she is applying for a HARP with Bank A, she has a home equity line of credit with another bank(Bank B) which is on the first lien. Her first mortgage did not originate from Bank A. She refinanced it from the original lender to a new lender then acquired by Bank A. Her line of credit being on the first is the problem. Bank B won’t allow to switch liens.

    What would be the best option for the customer?

    Thank you.

    • John, I tried drawing a picture to figure out what you’re trying to describe and I’m not clear on this scenario. It sounds like the borrower has a HELOC in first lien position due to a refinance? I’m guessing that a subordination was either not required or was not done properly? Have you tried contacting a title company to make sure this is accurate? I doubt any lender is going to want to be in second lien position to a HELOC. I wonder if she can pay it off or refinance the HELOC to a fixed mortgage?

  13. Candace H says:

    We currently have a first mortgage with Wells Fargo at a 7.78 interest rate. We also have a Heloc with them with an interest rate of 8.9%. Both of these loans were obtained in 2006 as a refi. Market value on our home was at it’s highest at that time. We are now underwater and have been told by Wells Fargo, that in order to refinance the first mortgage, we have to pay off the heloc, about 25k. We don’t have that. Could we still possibly refi th3 first mortgage with another lender to get a lower rate? Possibly with the HARP program?

    • Hi Candace,
      You can check to see if your first mortgage is eligible for a HARP refi by clicking the links to Fannie and/or Freddie at the bottom of this page: http://mortgageporter.com/home-affordable-refinance-program-harp-for-homes-in-washington-state There are more requirements than obtaining the mortgage in 2006 – the links to Freddie or Fannie will confirm if it’s eligible – that’s the first step! :) If it is HARP eligible, you may want to proceed with another lender to see if they can help you with a refi subordinating the second mortgage — however, your second lien holder (Wells Fargo HELOC) will still need to approve the subordination request — and it’s up to them — even if your existing mortgage qualifies for HARP, the second lien holder is not required to subordinate. It’s been my experience that most will and it’s not unusual to find that even when the same bank has the servicing on both the first and second mortgages – to have the same bank not cooperate with each other or seem to know what the other one is doing… so don’t give up — especially if your first mortgage is qualified for HARP. If your first mortgage is not eligible for HARP, you can still try to refi the first mortgage with another lender – however, you will probably be out the cost of the appraisal and the subordination request fee even if the subordination is refused. Good luck!

  14. I currently have a first mortgage with Select Portfolio which has modify under HARP. My second mortgage is with Bank of America. They are refusing to modify my second. What are my options?

  15. If I’m reading this correctly, the first loan can not be refinanced without taking care of the HELOC in one of the ways listed. However, I have a family member whose first loan was refinanced, and now the second lender is demanding payoff and refusing a new loan, and, again, the first loan has already been refinanced…so they aren’t be stopped from refinancing, they are flat out being asked for money they don’t have. What now?

  16. Hi, i have First mortgage with BOA; it was modified thru HAMP two years ago.
    Opened WF HELOC a couple months after the BOA mortgage in 2007.
    WF started foreclosure to secure first lien position. WF is saying they are first bc they never agreed to subordinate the Modification. Which bank is first lien?
    can WF foreclose as first lien? I Notified BOA of situation with WF HELOC but no response so far. What’s are my options?

    • Hi Jen, I would contact the title company who provided your insurance when you purchased the home. This probably won’t be covered by the title insurance company – however, they can most likely provide you with an updated report for a couple hundred dollars which can show you who is in first lien position.

      If BOA modified the existing mortgage and did not do a full refinance, which would create a new mortgage, then they should probably still be in first. However if they did do a new mortgage (a new recorded deed of trust) and if it was not subordinated by Wells Fargo, then Wells would probably be in first.

      If I were you, I would hire an attorney who specializes in this type of law.

      • Hi Rhonda,
        BOA recorded a Mod. Agreement but not a new DOT. However, after reading through land records, it appears that Boa was late to record their original lien by several months while WF recorded prompty so WF recorded one month prior to BoA. However, for many many years BoA collected escrow to pay taxes & WF referred to themselves as junior lien. Can WF now secure their lien position thru foreclosure? Thank you, i will f/u with the title company.

        • Jen, I cannot give you legal advise – I’m not an attorney – I’m just a mortgage originator who enjoys blogging and trying to help folks understand the mortgage process. Your situation calls for more help than I can give you. Please contact an attorney who specializes in this type of law.

  17. Vicki Johnson says:

    Rhonda,

    I came across your blog, and saw that many of the home owners don’t understand why a lender would not cooperate with refinancing, when the outcome is default by the borrower. I have the answer. It is in their best interest, as default is the most profitable due to the creation of derivitives in the mid 1990s, and the repeal of the Glass-Steagall Act of 1933 in 1998.
    A derivative (also known as Credit Default Swaps, this is what Hedge Funds manage) is an insurance policy on an asset portfolio, like mortgages, that insures the asset for the full value of the asset at the time the loan was originated. The financial industry has made year over year record profits because they invested in the derivatives, and then either sold the Mortgage Backed Securities on Wall Street or Leveraged (borrowed) against them at the Federal Reserve. When created, the Federal Reserve investigated derivatives and found them to be a huge potential threat to our economy, but the financial industry successfully lobbied the Fed (Greenspan & Bernanke) and Congress to keep them unregulated. The next move for the financial industry was to successful lobby the Congress & Executive Branch (Presidential Economic Advisor Larry Summers & Clinton) in 1998 to get the repeal of the Glass-Steagall Act of 1933. The critical protection for homeowners in Glass-Steagall was that Commercial banks were prohibited from putting their assets on Wall Street with Investment banks. Commercial banks played the crucial role in the current Great Recession, as buyers and sellers of mortgage-backed securities, credit-default swaps and other explosive financial derivatives. The Glass-Steagall Act of 1933 was created to protect American citizens from the Wall Street activity that created the 1929 crash and subsequent Great Depression. Without the repeal of Glass-Steagall, the banks would have been barred from most of these activities. Despite the minor reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012, as of 2014, there has been no regulation of Derivatives or reinstatement of the protection measures that were in the Glass-Steagall Act. Also, this is why some homeowners can not get investor cooperation to short sell their homes. My advice to home owners, BEFORE trying to refinance or shot sale, is to ask their loan servicers ( who are not usually the investor) if the loans are insured on the back end. As party to the contract (note) they legally can not be denied this information by a loan servicer or investor. If the answer is yes, on any note on the property (btw, this applies to unsecured assets like credit cards too) that investor will not agree to anything that impacts their derivative profits. Sadly, what is truly needed is aggressive financial reform at the federal level, which is impossible as long as The Legislative and Executive branches of government are allowed to profit in any way (contributions in election, investment & insider trading laws that they are exempt from).

  18. Does anybody have any experience getting B of A to subordinate a HELOC behind a HARP refi?

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