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When Refinancing Meets a Home Equity Loan

By manybanking.com Staff
With mortgage rates at record lows, it’s no surprise that many homeowners are looking into refinancing their existing mortgages. For those who have sufficient home equity, this can be a relatively straightforward process.

Category Product: 
Home Equity
Category Finance: 
Personal Finance
Keywords: 
Refinancing, Home Equity Loan, HEL, HELOC, Mortgage, Buying a Home, Owning a Home, Selling a Home, Home Owner, Housing, ARM, Adjustable Rate Mortgage
Introduction: 

By manybanking.com Staff
With mortgage rates at record lows, it’s no surprise that many homeowners are looking into refinancing their existing mortgages. For those who have sufficient home equity, this can be a relatively straightforward process.

Others may encounter some significant obstacles in their quest for lower monthly payments.

One of the biggest barriers to refinancing can be the existence of a home equity loan. Home equity loans are second mortgages, which means they are subordinate to your primary mortgage. Subordination is only important when it comes to recovering losses in the case of a default. If you default on your loan and it is foreclosed on, the primary lender gets the first “bite at the apple” when it comes to recuperating its loan. If there is any money left over from the sale of the home, that money goes to the next lender in line, the second mortgage.

With home prices falling, second mortgage lenders are taking big hits on foreclosures. When foreclosures are sold, they often fail to net enough to repay both loans on the property. If there is a home equity loan in play, it is likely to be written off entirely. This has made it much more difficult to get a new home equity loan.

Unfortunately, it has also made it more difficult to refinance a primary mortgage. When you refinance, your second mortgage goes to the front of the line for repayment after default. Your refinancing lender will not accept this, as they are loaning the higher of the two amounts. Consequently, you will have to resubordinate your home equity loan.

Resubordination is done by submitting a request to the home equity loan lender. It can take weeks to get the request approved. In some cases, the lender may deny the request. In most cases, a refinance will not damage the position of the second mortgage lender, but resubordination will still be denied. You can try contacting the lender to plead your case, but there may not be any way to convince the lender to agree.

If this happens, your only recourse is to pay off your home equity loan and close the account if you want to get the refinance completed. This can be done with a cash-out refinance if you have at least an 80% loan-to-value ratio. Alternatively, you could increase your payments on your home equity loan to pay it off sooner. Waiting a few months or so to refinance probably will not make a huge difference in the interest rate you receive, as there has yet to be any upward pressure on mortgage rates.

If you are refinancing to get out of an adjustable rate mortgage (ARM), the good news is you might have some time to work towards paying off your home equity loan. Even if your ARM adjusts, you probably won’t get hit hard. Interest rates are so low that you will probably be able to lock in at a near equivalent rate with an annual reset.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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Others may encounter some significant obstacles in their quest for lower monthly payments.

One of the biggest barriers to refinancing can be the existence of a home equity loan. Home equity loans are second mortgages, which means they are subordinate to your primary mortgage. Subordination is only important when it comes to recovering losses in the case of a default. If you default on your loan and it is foreclosed on, the primary lender gets the first “bite at the apple” when it comes to recuperating its loan. If there is any money left over from the sale of the home, that money goes to the next lender in line, the second mortgage.

With home prices falling, second mortgage lenders are taking big hits on foreclosures. When foreclosures are sold, they often fail to net enough to repay both loans on the property. If there is a home equity loan in play, it is likely to be written off entirely. This has made it much more difficult to get a new home equity loan.

Unfortunately, it has also made it more difficult to refinance a primary mortgage. When you refinance, your second mortgage goes to the front of the line for repayment after default. Your refinancing lender will not accept this, as they are loaning the higher of the two amounts. Consequently, you will have to resubordinate your home equity loan.

Resubordination is done by submitting a request to the home equity loan lender. It can take weeks to get the request approved. In some cases, the lender may deny the request. In most cases, a refinance will not damage the position of the second mortgage lender, but resubordination will still be denied. You can try contacting the lender to plead your case, but there may not be any way to convince the lender to agree.

If this happens, your only recourse is to pay off your home equity loan and close the account if you want to get the refinance completed. This can be done with a cash-out refinance if you have at least an 80% loan-to-value ratio. Alternatively, you could increase your payments on your home equity loan to pay it off sooner. Waiting a few months or so to refinance probably will not make a huge difference in the interest rate you receive, as there has yet to be any upward pressure on mortgage rates.

If you are refinancing to get out of an adjustable rate mortgage (ARM), the good news is you might have some time to work towards paying off your home equity loan. Even if your ARM adjusts, you probably won’t get hit hard. Interest rates are so low that you will probably be able to lock in at a near equivalent rate with an annual reset.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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