Refinancing has the potential to be a smart move that can save you thousands over the term of the loan. If you have a second mortgage and you’re thinking about refinancing the first one, it’s helpful to have an understanding of the process so you know what to expect. Here, I share more about what happens to the second mortgage when you refinance the first mortgage to help you determine if this is the right decision for you.
The Process of Resubordination
In order to refinance your first mortgage, you’ll need to have the lender of the second mortgage agree to resubordination (sometimes referred to as subordination). Resubordination means that the second mortgage will stay in the second position to be repaid, even after refinancing the first mortgage. Without agreeing to resubordination, the second mortgage would become first in line to be paid off once the first mortgage is refinanced–something that the refinancing lender cannot allow. Resubordination of the second mortgage is a must because if the home were to be foreclosed upon, the primary mortgage would be paid off before any funds were directed toward the subordinate loan.
Fortunately, most lenders of a home equity loan or equity line of credit will readily agree to resubordination. Although the equity lender isn’t required to agree to resubordination, they’ll almost always grant this permission if the property value is rising and the combined loan-to-value ratio is low enough. You’ll just want to avoid appearing too risky to the lender of the second mortgage. You can improve your chances of approval by maintaining a fixed-rate mortgage refinance instead of taking on an adjustable rate loan. In most cases, you’ll simply need to pay a fee between $200 and $500 and provide your income information and a copy of the appraisal to the lender of the second mortgage. Expect the process to take a couple of weeks, and have all the documentation on hand for a smooth procedure. If the equity lender agrees to the resubordination request, the agreement will be recorded at title.
By Michaela Phillips. Michaela is the Vice President of Mortgage Lending at Guaranteed Rate, Inc. Contact Michaela at 303.443.6292, e-mail [email protected] or visit michaelaphillips.com. NMLS: 312874.