2nd Mortgage Blocking Refinance?

Aug 13, 2012 by

Guide to Mortgage Refinancings

Click for the Federal Reserve’s Guide to Mortgage Refinancings

As of this writing the U.S. national average 30-year fixed mortgage rate is 3.64%. Wow. And that’s up from 3.58% a week ago. (I know the housing crash has been devastating overall, but I have to believe the money being left in many families’ pockets as they finance or refinance homes at incredibly low rates will be a very good thing for them and the economy, eventually.) Even homeowners with what was not very long ago considered a stellar mortgage rate are rightly looking to refinance.

But what if a homeowner has a second mortgage, say through a home equity loan or line of credit? Refinancing mortgage #1 is still possible, but a second mortgage means another hoop through which the homeowner must jump.

The Top Dog Wants to Keep It That Way

If you’re one of the half-dozen people in the country who have actually read all of their mortgage paperwork, you know your first mortgage specifies that any other mortgage you may take on—in addition to the first—would be “subordinate” to the first. That’s fancy banker talk for saying that, in the event you have financial problems and can’t pay the mortgages, the first mortgage holder is in line ahead of the second to foreclose and take possession of your house. (This is one reason the rates on second mortgages are higher than on first mortgages, all else being equal. They’re riskier, from the lender’s perspective.)

But during that very brief moment during refinancing when you’ve paid off mortgage #1 (to be replaced by a new, refinanced mortgage), the second mortgage holder suddenly moves to first place in line. That’s not okay with the refinance lender; it wants to be first in line, or it’s not going to lend you a nickel.

The Solution: Resubordination

To make your refinancing work, your new mortgage #1 lender will send to the holder of your second mortgage a resubordination request. “Resubordination” means mortgage #2 holder agrees to stay in second place, now behind your new mortgage #1 lender, in the event you default.

The holder of your second mortgage will charge you a fee to process the resubordination request, maybe $75 or $100. Lender #2 is not obliged to grant the resubordination request. Naturally, every lender covets the #1 spot! Though most resubordination requests are granted, you’ve got a couple of options if yours is denied:

  • Do a deal with your cranky second mortgage holder to combine both loans into one, new loan.
  • Eliminate the cranky second mortgage holder by replacing both your first and second mortgages with a single, refinanced mortgage, paying off the second mortgage holder in the process.

Closing costs can be significant with either of these remedies, so you must consider carefully whether refinancing is worth it, financially. You can find a multitude of refinance calculators by searching “should I refinance calculator,” or here’s one from Mortgage 101.

Have You Refinanced?

Have you cashed in on today’s amazingly low mortgage rates by refinancing? Did you face the resubordination challenge?

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