How to Refinance a Second Mortgage
A second mortgage is an additional home loan that takes priority after the initial, “first” mortgage you borrowed to buy your home. If you need to adjust monthly payments, lower your interest rates or just simplify your mortgage debt, it might make sense to refinance your second mortgage. However, before you get started, it’s important to understand what a second mortgage refinance really entails.
9 steps to refinance a second mortgage
Refinancing a second mortgage loan is similar in many ways to refinancing your first mortgage loan. There are certain steps you’ll need to take to get approved for a refinance, and certain factors to consider when comparing lenders and loan options.
- Determine if a second mortgage refinance is right for you
- Know where your credit stands
- Evaluate your financial situation
- Get documents in order
- Calculate your home’s remaining equity
- Talk to your existing lender
- Shop around for other lenders
- Apply for your refinance
- Keep making payments
1. Determine if a second mortgage refinance is right for you
While rates vary, it’s not unusual for lenders to charge 3% or more of the total mortgage as the refinance fee (on a $100,000 loan, that’s $3,000). If you don’t have the cash readily available, or if the savings you get from a lower interest rate won’t be equal to (or greater than) the fee, it may not be the right time.
2. Know where your credit stands
The first step in taking out any type of home loan is to understand what you’re likely to qualify for, according to your credit history. The better your credit, the better the loan terms you may be offered and the higher your likelihood of loan approval.
Request your free credit reports from each of the three major bureaus and review them for inaccuracies. If you find any errors, be sure to dispute them immediately.
Don’t know your credit score? Get your free score on LendingTree Spring today.3. Evaluate your financial situation
Part of qualifying for any mortgage loan, including a refinance on a second mortgage, is to see where your overall finances stand. This means looking at factors like your:
- Overall income
- Debt-to-income (DTI) ratio
- Total debt burden
If you owe too much or have too high of a DTI ratio, it may be worth holding off on your refinance until you can pay down some balances.
4. Get documents in order
Your lender will look at your credit score and DTI ratio to determine what type of terms to offer for your refinance. If you have a second mortgage through a different company than your first mortgage, you’ll need documentation from both.
You should also expect to provide proof of income (in the form of W-2s, pay stubs or previous tax returns), proof of certain assets and the like. Gathering these documents early can save you time and energy later.
5. Calculate your home’s remaining equity
A second mortgage holds the second position after your primary mortgage. This means that if you went into mortgage default and eventually foreclosure, the debt with your primary bank would be satisfied first. If there aren’t enough funds to satisfy your second mortgage debt, that lender simply takes a loss.
For this reason, second-mortgage lenders will want to see you have enough equity in your home, so they aren’t taking on too much risk. This means looking at your LTV, or loan-to-value ratio (LTV).
Knowing how much equity you have can help you determine which lenders are willing to refinance your second mortgage in the first place. It can also help you gauge what your refinance options are and what to expect from lender offers.
6. Talk to your existing lender
The first lender you should speak with is the one that currently holds your second mortgage. See if it’s willing to refinance the loan and what the requirements are. In some cases, you may snag the best refi terms with your existing lender since you’re already a customer; it knows your loan situation and usually doesn’t want to lose the account entirely.
7. Shop around for other lenders
Whether your existing lender offers a great refinance rate or not, it usually makes sense to rate-shop. Checking out interest rates and researching different lenders enables you to see which ones offer the best terms.
After shopping around for at least three to five other offers, you can make an informed decision about your available loan options and where you’ll save the most money.
Searching for a refinance lender? Our list of the best refinance lenders is a great place to start.
8. Apply for your refinance
Once you’ve chosen your lender, it’s time to submit your application. Be prepared for a phone call (or two) and requests for additional information.
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9. Keep making payments
Your lender will review your refinance application and finalize any paperwork; however, know that this process isn’t always quick. In the meantime, it’s important to continue making payments on your existing second mortgage during the refinance process.
Any adjusted terms will take effect with your new loan once it is funded. After your lender approves your refinance, you’ll be sent a statement detailing the amount owed, due date, interest rate and more.
When to refinance a second mortgage
There are several reasons that you might want to refinance a second mortgage. Here are some common situations when a second mortgage refinance could make the most sense.
→ To roll your first and second mortgages into one loan. If you have a second mortgage loan, you’re juggling two account balances and two monthly payments. Some borrowers may instead choose to use a cash-out refinance to combine their remaining first mortgage balance with their second mortgages, rolling both debts into one new loan.
Whether this is possible for you depends on factors including your credit score, DTI ratio and total LTV. You should also be aware that if you choose a conventional refinance, you’ll have increased loan costs when you take cash out — that’s because Fannie Mae and Freddie Mac consider a cash-out refinance riskier to offer than a normal refinance.
→ To lower your interest rate. Second mortgages tend to have higher interest rates than first mortgages, since these lenders are taking on higher risk as the secondary lien on the home. Refinancing your mortgage once you’ve built up additional home equity, however, can help you lower the interest rate on your second mortgage.
→ To save money if your credit has improved. You may also be able to lower your interest rate if your credit score has improved since you initially took out your second mortgage loan.
The better your score, the lower risk you represent to lenders. So if you’ve paid off debt, established a positive payment history and/or had negative reports fall off your credit since you took out your loan, a refinance could net you better terms.
→ To lower your monthly payment. Whether you’re refinancing your second mortgage or your primary home loan, you can use a refi to lower your monthly payment amount. This can be done by extending your loan period, lowering your loan’s interest rate or both.
→ To lock in a fixed rate. If you have a second mortgage with an adjustable interest rate, you may want to use a refinance to lock in a fixed rate. While variable rates can be beneficial during certain times, they pose a greater risk to many borrowers and have the potential to cost you a lot more in the end.
→ To refinance a high-rate second mortgage you took out as part of a piggyback loan. You might want to switch from a home equity line of credit (HELOC) to a home equity loan to have more flexibility with the use of the line of credit. Or the other way around, pay off a HELOC so you have a stable, fixed-rate second mortgage payment.
What is a piggyback loan?
A piggyback loan is a second mortgage taken out during the homebuying process, allowing you to essentially split the home purchase between two loans. In doing so, you reach the threshold of 20% equity needed to avoid paying private mortgage insurance (PMI) on the primary mortgage.
A common piggyback loan is known as the 80/10/10 loan — with this loan, you take out a primary mortgage loan for 80% of the home purchase, take out a second mortgage for 10% and pay the final 10% out of pocket as a down payment.
Pros and cons of refinancing a second mortgage
Pros
You can lower your interest rate. By refinancing any home loan (first or second), you have the ability to lower your loan’s interest rate and save money in the long run. This is possible if market rates have shifted, your credit has improved since you took out the loan or you’ve established more equity in your home.
You can simplify both mortgage loans. A second-mortgage loan can be used to combine your primary and secondary mortgage loans into one account. This allows you to have only one interest rate, one monthly payment amount and one balance to manage.
You can adjust your monthly payment. If you need (or just want) to adjust your loan’s monthly payment amount, a refinance can help you do so. Refinancing may drop your interest rate, extend your loan term or both — each of which can lower your monthly payment.
You can lock in a fixed interest rate. If you have a variable interest rate, refinancing may allow you to lock in a fixed rate instead. This has the potential to save you a lot of money in the end, especially when market shifts impact overall rates.
Wondering where mortgage rates are headed? See our mortgage rates forecast.Cons
You’ll pay fees for your refinance. Refinancing isn’t free, and borrowers can expect to pay certain refinance closing costs and fees. If your refi won’t save you more than you’ll pay in fees, reconsider whether it’s the right move.
You can impact your credit score. Closing one mortgage account and opening another can affect your credit score, even if it’s temporary. Hard inquiries, new accounts and closed tradelines all affect your score calculation.
You may not be able to sell your home. In many cases, you can’t sell your home while you still have an active second mortgage balance. Instead, you may need to pay off your remaining balance prior to putting your property up for sale.
Types of second mortgages
There are two primary types of second mortgages to consider, whether you want to make buying a home easier or access your home equity.
1. Home equity loan
One of the most common second mortgage products is the home equity loan. This installment loan allows you to borrow a percentage of your home’s equity in a lump sum, which you can use to pay off high-interest debt, make improvements to your home, purchase another property and more.
These loans generally have a fixed interest rate and fixed monthly payments, along with a set repayment term.
2. HELOC
A home equity line of credit (HELOC) is another type of second mortgage. This product allows you to access a portion of your property’s equity as you need, via a revolving credit line.
These products generally have variable interest rates, though you’ll only need to worry about repayment if and when you withdraw funds.
Frequently asked questions
Borrowers can put their home equity to work through a second mortgage by using it for home renovations, business startup fees, medical expenses, debt payoff or even an investment property purchase.
Though actual rates vary, second mortgage lenders often charge between 2% and 5% of the total mortgage in closing costs. Borrowers who can’t pay these costs upfront — or won’t break even between this fee and the savings on their new loan — should consider whether a second mortgage is worthwhile.
In most cases, you can’t sell your home when you have a second mortgage on the property. Borrowers in this situation may consider refinancing their second mortgage with their first mortgage and consolidating the loans into one.
Each lender will have its own borrowing limits and home equity requirements. Generally speaking, though, eligible borrowers can expect to take out a maximum of 85% of their home’s value, minus their outstanding mortgage balance.
Let’s say you have a home worth $300,000 and a remaining mortgage balance of $200,000; in this case, you have $100,000 in home equity. However, most lenders will limit your second mortgage to no more than $55,000 ($300,000 x 85% = $255,000; $255,000 – $200,000 = $55,000).
Any time you add or refinance debt, you have the potential to impact your credit score. By refinancing a second mortgage, you also drop your average age of accounts and add a hard inquiry to your credit report — both of which can impact your score.
It’s possible, but it isn’t simple. In order to refinance your primary mortgage, you’ll have to get the lender who financed your second mortgage to agree that its loan can remain “second,” behind the new refinance loan that will replace your primary mortgage. If it agrees to this, it’ll then have to sign a document called a subordination agreement to make it official.
Refinancing a primary mortgage can also be more expensive when a secondary mortgage is attached and will remain once the refinance is complete. Fannie Mae and Freddie Mac add a fee to this type of transaction, except in the case of HELOCs with a zero balance.