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. A second mortgage is another lien on the property.

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.

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.