refi - The Mortgage Porter

Second Mortgage Subordinations May Cause Huge Delays with Refi’s

March 11, 2008 by Rhonda Porter 13 Comments

If you have a second mortgage (home equity line or fixed term), and you are not going to pay it off during a refinance; it needs to be “subordinated”. This is because of lien position with your mortgages…who gets to be first. Lien position is determined by when a document (such as a Deed of Trust) is recorded at the county. If you have two mortgages and are only refinancing the first mortgage, the second mortgage will need to be “subordinated”. The subordination agreement is a recorded document with the second mortgage lien holder and the borrower that the second mortgage will go back into second position after the new first mortgage is recorded. If this document was not recorded, than the old second mortgage would be in “first lien position” and the new refinance would be in “second lien position”. This boils down to which mortgage has more rights in the event of a foreclosure…everyone wants to be first as the further down the line you are, the higher the odds are that the lien may not be cashed out (again, in a worse case scenario).

Prior to our current mortgage crisis, a subordination agreement typically was not an issue. We send a request for subordination along with a copy of the appraisal from the refi. The second mortgage lien holder would review the request, consider the amount of equity remaining in the property and 9 times out of 10, agree. This process would take a couple days.

With more banks being concerned about depreciating or soft values, they are now taking much much longer to consider if they will all allow a subordination to take place. In fact, I recently closed a transaction where the bank took over 10 business days (this eats away at your lock) for a borrower with 800 credit scores and a loan to value of just over 50% to subordinate a HELOC that with a zero balance. An Account Manager from a bank that does a large amount of second mortgage recently sent out this memo:

“UPDATE on SUBORDINATIONS: Please get your files in early… the subordination dept is running approx 20 business days. I do not have any contacts for rushes etc. They are trying to work date sensitive deals, but they have not been able to get caught up…”

Folks…20 business days is a month!

If you are refinancing and have a second mortgage or HELOC that will not be included in the refinance, make sure your loan originator is aware and that they know how long subordinations are taking so they can lock your rate in appropriately. A 30 day lock with a 20 day subordination is not going to cut it. You’ll be looking at having to deal with a lock extension.

If your loan to value is higher, there is a possibility that the subordination may be declined. Discuss this with your loan originator upfront. Lenders are looking at any way to protect themselves from additional risk during these historic times. If your loan amount qualifies and you have enough equity, you just may have to include that second mortgage in your refinance.

Filed Under: Home Equity Loans & Second Mortgages, Refinance Tagged With: refi, second mortgage, subordination

Skip Two Mortgage Payments when You Refi!

February 24, 2008 by Rhonda Porter 7 Comments

The promise of not having to write a check for your mortgage payment for two months seems so tempting that many home owners chomp on the bit when a Loan Originator dangles that bait to lure in a refi candidate. The truth is you’re not skipping anything.

Typically when your close on a mortgage, your first mortgage payment is the following month after 30 days have passed. So for example, if your mortgage was closing on February 22, your first mortgage payment is due on April 1. Although it seems like you’re “skipping” a month, what’s happening here is that the mortgage interest on the new loan is prorated from the day you close. Based on this scenario, your interest is starting on February 22 and is prorated until the 28 (or 29 in a leap year such as we have this year). The 6 extra days of interest is charged to you at closing under the prorated interest on your HUD-1 Settlement Statement. Mortgage payments have 30 days of interest in arrears because of this and this is why your payoff is always higher than your monthly statements by about one mortgage payment (30 days of interest).

In order to do the “Skip Two Mortgage Payments” tango, your refinance needs to close as close to the 15th of the calendar month as possible and you, dear home owner, do not make your mortgage for that month. So using our same example, if you closed your mortgage on February 15 and do not make a mortgage payment for February, your new mortgage payment is still not due until April 1. You will have 15 days of prorated interest due at closing (half of a mortgage payment). Did you skip anything? No. You only saved writing a check. The interest is still there and nothing is free.

When home owners try “skipping” payments, they also risk late fees being assessed by the bank who is being paid off. If they do not receive the payment by the 15th, the borrower will have a late fee. Even if the escrow company wires the payoffs to the underlying lender, there’s no guarantee they will receive it in time.

Click here for a refi rate quote for your home located in Washington.

I was helping a couple with a potential refinance and they were very interested in skipping two month’s payments. This would have been especially costly for them as we were paying off a FHA mortgage. FHA mortgages do not prorate the interest when they are being paid off. It only makes sense whenever possible to close them at the end of a calendar month so that the home owner isn’t paying double interest. If they would have closed on February 15, they would have felt like they were “skipping” however their mortgage payoff would have had interest through the end of February AND they would have paid 15 days of prorated interest on their new mortgage.

Loan Originators who use “skip two months payments” are hoping to skip all the way to the bank. In fact the LO who was trying to lure the couple I helped last month was charging them 3 points for the same rate that I was offering priced with 1 point. This lender is not from Washington State and has to rely on deceptive mailers in order to get new business…I’m sure it’s because no one who has obtained from them would return or refer their friends and family to them.

There’s nothing wrong with scheduling your closing so you have the illusion of skipping two payments, just know going in what it takes to make this happen and what your risks are (late fees).

Click here for a refi rate quote for your home located in Washington.

Filed Under: FHA, Predatory Lending, Refinance Tagged With: payoffs, refi

Would You Like Your Mortgage Blended, Shaken or Stirred?

March 27, 2007 by Rhonda Porter 4 Comments

Many home owners have two mortgages on their properties. A first mortgage and a second mortgage that may either be fixed or a home equity line of credit. Do you know what your effective rate is? Basically, this is if you factor in what your paying on both mortgages, and then figured out what your interest rate is on your payment.