Refinancing a second mortgage: What you need to know

Refinancing your mortgage can result in a new loan with lower interest rates and smaller monthly payments. If you lower your interest rate by enough, you could shave hundreds (or thousands) of dollars off your mortgage payments.

But what if you also have a second mortgage, like a home equity loan or home equity line of credit? Can you refinance those mortgages? And is it possible to refinance your first and second mortgage together?

You can. But you’ll have to meet certain mortgage refinance requirements.

Can you refinance a second mortgage?

Yes, you can refinance your second mortgage. Some homeowners might want to refinance both their first mortgage and their home equity loan or HELOC into one mortgage loan. This will leave them with one monthly payment instead of two. If their new interest rate is low enough, they might also reduce the amount they pay each month.

The challenge lies in home equity. Most lenders require borrowers to have at least 20% equity in their homes to refinance their mortgage. Borrowers will need enough equity to reach that percentage even though they’re refinancing two mortgages.

It’s also possible to refinance only your second mortgage. For instance, you might want to refinance a HELOC with an adjustable interest rate – one that changes over time – to a home equity loan with a fixed rate that remains the same, making it easier to budget for your monthly mortgage payment.

What is a second mortgage?

Before we look more at the process of refinancing a second mortgage, let’s thoroughly describe a second mortgage. As its name suggests, a second mortgage is any mortgage other than your primary mortgage loan, resulting in two monthly payments. A second mortgage is another lien on the portion of your property you have already paid off, meaning a failure to pay can lead to foreclosure. Interest rates for second mortgages are often higher than those for primary mortgages or refinances, but there are circumstances where they might be a good choice for you. Common reasons for getting second mortgages are a need to consolidate credit card or other high-interest debt, an inability to get a cash-out refinance, and a need to recover from revolving expenses.

How rates differ for a second mortgage

Second mortgage refinances generally come with higher interest rates, but there are ways to work with this if it’s a concern for you.

Factors that influence rates for refinancing a second mortgage

Refinance interest rates are affected by a variety of factors, only some of which are in a homeowner’s control. Things like inflation, the bond market, the federal reserve, and other matters pertaining to the national economy are beyond the control of the individual. However, one’s credit score and debt-to-income ratio (DTI), as well as how much of the refinance closing costs are paid up front, are some of the factors an individual homeowner can change to influence interest rates. The amount and term of the loan, as well as whether it’s fixed-rate or adjustable, also impact interest rates.

Is refinancing a second mortgage worth it if the rates are higher?

Even if refinancing a second mortgage results in higher rates, it can still be worth it under certain circumstances. Refinance interest rates are generally lower than those for credit cards, graduate student loans, and certain other kinds of loans you might find yourself struggling with. Consider your situation carefully to decide what’s best for you.

Can I lower my second mortgage refinancing Rate?

You can lower your second mortgage refinancing rate the same way you can for any refinance. A higher credit score and a lower DTI both correlate with lower interest rates, so be sure that these are in order before applying for a second mortgage refinance. Paying closing costs up front or considering a co-signer can also lower your rate. You can always shop around to find the best rate available or, instead of seeking a new lender, speak with your current lender to see if there are options for current customers.

Types of second mortgages

There are several types of second mortgages available to homeowners. Let’s walk through the most common second mortgage options you may encounter.

Home equity loan

A home equity loan is similar to your primary mortgage, but the amount you can borrow is based on your home’s equity. Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $200,000 and you owe $120,000 on your mortgage loan, you have $80,000 in equity.

How do home equity loans work?

As a homeowner, you can take out a second mortgage loan – a home equity loan – against that equity. You’ll receive the money in one lump sum payment and pay it back in monthly installments with interest, just like your primary mortgage. You can use that money for anything.

If you use it to fund an improvement that increases the value of your home, you can write off the interest you pay on your income taxes. Consult a tax professional if you have any questions.

Home equity line of credit (HELOC)

You can also take out a home equity line of credit, better known as a HELOC. The amount you can borrow through a HELOC is again based on your home’s equity. But a HELOC acts more like a credit card, with a maximum credit limit based on this equity amount.

Say you have $80,000 of equity. And that you can take out a HELOC with a borrowing limit of $60,000. You then pay back only what you borrow. You might only borrow $30,000. You’d then have to pay this back, with interest, in monthly installments.

How do HELOCs work?

With a HELOC, you make full repayments of principal and interest in the latter part of the term. The first several years are referred to as the draw period. During this time, you can take money out and put it back in if you wish to take it out later for future projects. You’re only required to pay interest on what you borrow during this time.

Rocket Mortgage^® doesn’t offer HELOCs at this time, but we want you to understand your options.

Piggyback mortgages

Finally, there are piggyback mortgages. Borrowers might take these out to avoid paying private mortgage insurance (PMI), an insurance that may be required on conventional loans when the borrower puts down less than 20%.

How do piggyback mortgages work?

Piggyback mortgages are also known as 80-10-10 loans. That’s because borrowers cover 80% of the home’s cost with a standard first mortgage loan. They cover the second 10% with a second mortgage loan, usually a home equity loan or HELOC. They then pay for the final 10% of the home’s price with their down payment.

Rocket Mortgage^® doesn’t offer piggyback mortgages at this time.

Can you refinance a primary mortgage when you have a second mortgage?

You can still refinance your primary mortgage if you have a second loan on your home. That second mortgage just makes the process more complicated.

There are two ways to close a refinance of a primary mortgage when you have a second mortgage. First, you can refinance both your primary and second mortgages into one loan.

Refinancing two mortgage loans into one

Say you owe $150,000 on your primary mortgage and $50,000 on your second mortgage. You'd need to refinance the two loans into one loan of $200,000 – or more if you’re rolling closing costs into your new loan. However, if you don't have 20% equity in your home, you won't be able to do this.

Refinancing your second mortgage only

But what if you want to keep that second loan? Maybe your second loan is a HELOC, and you like the flexibility of having a line of credit against your home's equity. You can refinance your primary mortgage if the lender who holds your second mortgage agrees to what’s known as resubordination.

What is resubordination?

Under this process, the lender of your second mortgage agrees to remain in the second, or subordinate, position after you refinance your existing primary mortgage. Usually, your second mortgage will become your primary loan after such a refinance because it’s the older debt. Then, you'll need to request that the holder of your second loan agrees to waive this position and remain in the second or subordinate position after your refinance closes.

If the lender doesn't agree to this, you won't be able to close your refinance and keep that second loan. No mortgage lender giving you a primary mortgage loan will agree to the subordinate position.

Fortunately, most lenders will agree to resubordination. You'll usually have to pay a small fee and submit some paperwork to make the resubordination happen.

Pros and cons of refinancing a second mortgage

Refinancing can save you money. But that doesn’t mean there aren’t both positives and negatives involved with this financial move.

Pros

There are several advantages to refinancing your second mortgage. Let’s look at some reasons why it might make sense to do so.

Lower your monthly payment

The most common goal of refinancing any mortgage is to lower your monthly payment. You do this by refinancing to a new mortgage with a lower interest rate. That lower rate will give you a lower monthly payment. It’s true that second mortgages generally aren’t as large as primary loans. But reducing the rate on a second mortgage can still bring significant savings each month.

Switch from two monthly payments to one

If you have a second and first mortgage, you’ll have two payments to make each month. This can complicate your bill-paying routine and might increase the chance you’ll accidentally forget to make one of your payments. By refinancing your first and second mortgages into a single loan, you’ll eliminate one payment each month.

Eliminate that adjustable-rate mortgage

Maybe your second mortgage features an adjustable rate, one that rises or falls depending on the performance of certain economic indexes. These fluctuations can cause your mortgage payment to rise or fall, too. If you want more certainty, you might refinance your adjustable-rate mortgage into a fixed-rate loan.

Cons

Of course, refinancing your second mortgage comes with some downsides too. You’ll want to carefully consider the following cons when determining if refinancing is the right move for your second mortgage.

Refinancing isn’t free

There’s a cost to refinancing your mortgage. Though it varies by lender, you can expect to pay from 2% – 6% of your loan’s principal balance in closing costs. You’ll have to determine if you can lower your interest rate by enough to generate sufficient savings to pay back these costs quickly.

Missing payments could mean you’ll lose your home

Any time you take out a new mortgage – whether it’s through refinancing or taking out a purchase mortgage when you buy a new house – you put yourself at increased risk of losing your home. That’s because if you stop making your mortgage payments, your lender can take ownership of your home through the foreclosure process.

How to refinance a second mortgage

If you’re ready to refinance your second mortgage – maybe by refinancing a HELOC into a fixed-rate loan – the first step is to shop for a mortgage lender. You can refinance with your current lender, either the one that originated your primary mortgage or the one behind your second. On the other hand, you could shop around instead and refinance with any lender licensed to do business in your state.

1. Prove your income

Once you settle on a lender, you’ll most likely need to provide certain documents that prove you have enough income to make your mortgage payments on time. These documents can include copies of your last two paycheck stubs, last 2 months of bank account statements, tax returns from the last 2 years and your W-2 forms from the last 2 years.

2. Review your credit score

Your lender will study these documents and consider several key numbers. Lenders will also look at your three-digit credit score to make sure you have a history of paying your bills on time. The higher this score, the more likely you’ll earn approval for your refinance request.

Lenders consider FICO^® scores of 760 or higher to be excellent. You’ll need a strong score to nab an interest rate low enough to make refinancing worthwhile.

3. Verify your debt-to-income ratio

Your debt-to-income ratio, also known as your DTI ratio, is also key. This ratio looks at the relationship between your monthly debts and income. Ideally, most lenders want your total monthly debts, including your new mortgage payment, to equal no more than 43% of your gross monthly income.

There’s some leeway here, though, as different lenders might be more willing to work with borrowers with higher DTI ratios.

4. Check your loan-to-value ratio

Your loan-to-value ratio, or LTV ratio, is another important factor in your refinance. As the name suggests, your LTV is the ratio of how much you owe on your current mortgage loan – or loans – divided by the current value of your home. If your home is valued at $150,000 and your combined mortgages equal $90,000, your LTV is 60%.

Most lenders require you have at least 20% in equity to qualify for a refinance. This means you'll need an LTV of 80% or less.

The bottom line: Refinancing a second mortgage may be right for you

Refinancing a second mortgage might take more time, but it could also bring solid monthly savings. If you’re ready to make this move, consider starting an application for a refinance with Rocket Mortgage. You can also give us a call at (833) 326-6018.