Refinancing when you have an existing Second Mortgage or HELOC

Dec 15, 2011 by +

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.

26 Comments

  1. Mendel

    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. Carrie

    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.

      • Carrie

        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!

        • Adrian

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

          • Carrie

            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?

          • Adrian

            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

    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

        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

            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

    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. Tamara

    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. Michi

    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. Val

    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

    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. Kathy

    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!

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