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Can I Refinance With A Second Mortgage

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How Much Can I Borrow

Can I pay off a second mortgage with a rate-term refinance?

A HELOC lets you borrow up to 80% of your homes value, while a private mortgage home equity loan lets you borrow up to 95%. This is after accounting for your existing first mortgage loan. However, not all private lenders allow a max LTV of 95%. In any case, the smaller your existing first mortgage, the larger your second mortgage can be.

For example, lets say that:

  • Your home value is $500,000
  • You have an existing $200,000 mortgage

How much can you borrow with a HELOC?

  • $500,000 x 80% HELOC limit = $400,000 maximum
  • $400,000 maximum $200,000 existing mortgage = $200,000 HELOC limit
  • With a HELOC, the maximum amount that you can borrow is $200,000

How much can you borrow with a home equity loan from a private lender?

  • $500,000 x 95% home equity limit = $475,000
  • $475,000 maximum $200,000 existing mortgage = $275,000 home equity loan limit
  • With a home equity loan from a private lender that allows a maximum LTV of 95%, the maximum amount that you can borrow is $275,000

To find out how much you can borrow with a second mortgage, you can use asecond mortgage calculator.

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When To Consider A Home Equity Line Of Credit

If you need extra money intermittently, a variable-rate home equity line of credit might be your best choice. Once the lender approves you for a maximum line amount, you can access the available funds as you need them. Use your Home Equity Line of Credit Visa Access Card anywhere Visa is accepted, write a check, visit a branch or ATM, or log in to Online or Mobile Banking and transfer money to your U.S. Bank savings or checking account. You may have ongoing access to funds for 10 years, called the draw period, following the date you open your line of credit. After the draw period you’ll have a repayment period of 20 years.

Monthly minimum payments are variable and based on the amount of the line balance and the variable interest rate. As you pay the money back, the funds are available again on your HELOC. This provides you with a renewable source of funding during the 10-year draw period. This is a good option if you anticipate the need to make periodic payments for tuition or remodeling.

Although a home equity line of credit provides ongoing access to available funds, which may be tempting for some people, there are some critical things to consider.

  • You have to pledge your home as collateral
  • If you dont make payments, your property can go through foreclosure
  • Your credit score is on the line if you arent diligent with your payments

Underwater With Two Mortgages Here Are 5 Ways To Refinance

Having a second mortgage or home equity line can make refinancing an underwater mortgage nearly impossible, but one of these five strategies might bail out your refinance.

The mortgage market is awash in programs to help underwater home owners refinance, but if you have a second mortgage or a home equity line thats causing you to owe more than your home is worth, you could be left high and dry.

If the first and second mortgages on your home put together exceed its value, youre underwater.

To understand why being underwater on your two mortgages is a problem, you need to know how first and second mortgages work:

  • When you get your first mortgage, that lender is first in line to get paid off if you don’t pay your mortgage and your home is sold via foreclosure.
  • When you then get a home equity line or second mortgage, it’s called a second mortgage because that lender is second in line to get paid.
  • When you refinance your first mortgage, you actually pay off the original first mortgage. Unless you pay off the second mortgage, too, your second mortgage legally and automatically moves into place as your first mortgage.
  • No lender will give you a low, first mortgage interest rate unless it can be first in line for the foreclosure sale proceeds if you don’t make your payments. If your second mortgage has moved into first position, any new loan would automatically be behind it in line.

Here are five options that can help you refinance your first mortgage anyway:

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When Should You Refinance A Second Mortgage

There are many circumstances under which it could be a good idea to refinance. However, no two situations are the same. You may want to refinance a second mortgage to condense your loans but in other situations, you may not want to cash-out refinance a second mortgage. Therefore, be sure to speak with a mortgage professional before suits your needs.

There are relatively low-interest mortgage rates available and these are a common reason homeowners refinance a second mortgage. Many people choose to refinance a second mortgage to take advantage of interest rates that are lower than when they initially took out their second mortgage. Additionally, their financial situation may have improved, and they could qualify for lower interest rates that way.

To receive a lower interest rate on a second mortgage refinance, a person needs to maintain their financial standing, including their credit score. A person with strong credit and consistent mortgage payments will have a better chance of getting a more favorable refinance interest rate than someone with below average financial standing.

Finally, people who can switch from a variable interest rate to a fixed-rate might want to refinance their second mortgage. This is very common with piggyback loans.

Home Equity Line Of Credit

Refinance Mortgage, Refinancing Rates, Mortgage Rates

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 homes 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. 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. Youd then have to pay this back, with interest, in monthly installments.

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. Youre only required to pay interest on what you borrow during this time.

Rocket Mortgage® doesnt offer HELOCs.

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Find Out If You Qualify

Its essential to talk to an expert about whether you are eligible for a refinance on your second mortgage. Your lender might look at your property value to ensure it meets minimum required LTV ranges. They will also look at your credit score and other financial documents to decide if you are eligible for a refinance.

Options When Resubordination Is Denied

If your home equity lender says no to resubordination but you still want to refinance, one solution would be to pay off the second loan, if you have the resources or possibly through a cash-out refinance.

However, you must retain at least 20 percent equity in the property after the cash-out refinance or youll have to pay private mortgage insurance. That extra cost could put the savings from a refi far away.

Another factor is that lenders have tightened credit amid the ongoing rate-driven refinance boom. Adding extra debt to your refinance may make lenders less keen to underwrite the new loan and if so your rate may be slightly higher.

But, on the plus side, thanks to those low rates, you may be able to save money by consolidating all your mortgages into a single loan if it works out.

One more route is to find a lender who will do a simultaneous first and second mortgage refinance. This way you can keep the second mortgage credit line and get a new first. A mortgage broker may be able to assist you with this and other types of refis that involve a second mortgage.

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How To Use A Second Mortgage

When you take out a second mortgage, you have ultimate freedom in deciding what to do with it. However, financial advisors strongly recommend that you use this money wisely for items that have lasting value, such as making a home improvement, investing in education and funding major expenses. Second mortgages can also be used to consolidate debt, to reduce interest payments or to avoid the need to pay PMI on your first mortgage. Borrowers are cautioned to avoid using second mortgages for everyday expenses or for paying off outstanding debt without having a clear plan to reduce spending and prevent building more debt. Its important to remember that you could lose your home if you are not able to make regular loan payments on your first or second mortgage.

Resubordination Can Be Problematic These Days

Difference Between a Second Mortgage and a Mortgage Refinance | LowerMyBills

Resubordination is usually the path of least resistance, although it does take time and can involve extra fees. Keep in mind, however, that home equity lending has tightened during the pandemic and these days many lenders will simply not want to be bothered or want to take on additional risk.

If you want to go this route, before you can refinance your primary mortgage, your lender must submit a subordination package all of the documents supporting the request to the institution holding your home equity loan or line of credit. The second mortgage lender, if they want to go along, typically charges a few hundred dollars to review the package, and approval can take up to six weeks.

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How Does A Second Mortgage Work

Along with your monthly payment for your primary mortgage, youll make repayments on your second mortgage. If you obtain the primary mortgage and the second mortgage from different companies, youll pay each lender separately. As you make payments on both loans, you will regain equity in your home.

Keep in mind that you wont be able to access all of your home equity when you choose a second mortgage. For instance, if you have $90,000 worth of equity, you may only be given access to $80,000. The amount of equity you may need to leave in your property can vary based on several factors, including your current debt, your credit score and your lender.

Is A Home Equity Loan A Second Charge Mortgage

A home equity loan is sometimes referred to as a second charge mortgage because it is also a separate debt that is secured against home equity and repaid in the same way as a second mortgage would be.

A home equity line of credit has a couple of differences in the way the loan is paid out and repaid, but this is also referred to as a second charge mortgage by some people.

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Pros Of Taking Out A Second Mortgage

Some of the benefits of taking on a second mortgage include:

  • Flexibility: You can choose how you get your money. You can often pick between a home equity loan and a HELOC. If you need a lump sum, youll usually choose a home equity loan. On the other hand, if you have an ongoing project like a home renovation and you arent sure how much money youll need, a HELOC gives you access to a credit line. HELOCs even allow you to defer payments until after the draw period is over. This freedom of choice isnt available when you refinance.
  • Fewer closing costs: Home equity loan providers typically cover all or most of the closing costs associated with getting your loan. This can potentially save you thousands of dollars, as closing costs for refinances usually range between 2% 6% of the total loan value.

Get Your Paperwork Organized

Can I Have Multiple Mortgages

Finally, its crucial to get your paperwork/information organized. Your lender will need to see your current mortgage, especially if your second mortgage is through a different company than the one you are refinancing with. If possible, it would also be helpful to have the documents available from your first mortgage.

If you are hoping to get a lower interest rate, you may want to keep an eye on your credit history and have documentation of any hard inquiries. Having documents that outline your other loans such as student or auto loans are beneficial too

Finally, have your W-2 or other income statements to prove your DTI ratio to help you qualify for a lower interest rate. As always, you should speak with your lender to see if there are any additional or unique documentation requirements not mentioned above or if your situation requires other information.

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What If I Have A Second Mortgage On My Home Can I Still Refinance

Typically, any second mortgages are paid off through the refinance. You can consolidate both loans into one new first mortgage and you will only have one payment each month.

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When To Refinance A Second Mortgage

There are several reasons that a borrower may want to refinance a second mortgage. Here are some common situations when a second mortgage refinance could make the most sense.

To roll your first and second mortgages into one loan. If you have a second-mortgage loan, you are already juggling two account balances and two monthly payments. Some borrowers may instead choose to combine their remaining first mortgage balance with their second mortgages, rolling both debts into one new loan.

Whether this is possible for you depends on factors including your credit score, DTI ratio and total LTV.

To lower your interest rate. Second mortgages tend to have higher interest rates than first mortgages, because these lenders take on higher risk as the secondary lien on the home. Refinancing your mortgage once youve built up additional home equity, however, can help you lower the interest rate on your second mortgage.

To save money if your credit has improved. You may also be able to lower your interest rate if your credit score has improved since you initially took out your second-mortgage loan.

The better your score, the lower risk you represent to lenders. So, if youve paid off debt, established a positive payment history and/or had negative reports fall off your credit since you took out your loan, a refinance could net you better terms.

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Where Mortgage Rates Are Headed

Mortgage rates plunged early in the pandemic and scraped record lows below 3 percent at the start of 2021. The new year, however, has been characterized by rising rates. The days of sub-3 percent mortgage interest on the 30-year fixed are behind us, and many experts think the average rate on this loan will be 3.5 to 4 percent by the end of 2022. Thats still great by historical standards though. The ultra-low rates of 2020 and 2021 were an anomaly, but even 4 percent is a deal in the scheme of things.

Mortgage rates continue to surge, as they have since the beginning of the year, as the outlook takes shape for Fed rate hikes that are sooner and faster than previously expected, McBride says. Mortgage rates are still well below 4 percent but in an environment of already sky-high home prices, more would-be homebuyers are priced out with each move higher in mortgage rates.

Second Mortgages Often Have Higher Interest Rates Than Cash

Refinance Vs Second Mortgage. Which makes sense for you?

Although a second mortgage is a secured loan that typically offers a lower rate than what credit cards or personal loans offer, the primary mortgage holder still has first claim on your house.

This means the second mortgage holders claim on the property isnt quite as secure as when theres only one mortgage on the home. Thats because the primary lender would have first dibs on the proceeds from a home sale if foreclosure was necessary. So your mortgage rate on a second mortgage will likely be higher than the rate on your first mortgage and higher than the rate on a cash-out refi.

If you take a cash-out refi loan, you wont have this issue. Youd have one loan, and that lender would have the primary claim to any proceeds from foreclosing on your home if doing so became necessary. As a result, the rate youre offered for a cash-out refinance loan will likely be lower than the rate for a second mortgage rate would be.

Consider these big differences between cash-out refinance loans and second mortgages if youre interested in tapping the equity in your home. Understanding these factors can help you make the choice thats right for you.

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How To Combine Two Mortgages Into One

Having two mortgages isnt as rare as you might think. People who amass enough equity in their homes often elect to take out a second mortgage. They might use this money to pay off a debt, send a child to college, finance starting a business, or make a large purchase. Others will use a second mortgage to enhance the value of their home or property through remodeling or constructing additions such as a swimming pool.

Two mortgages, however, can be trickier than holding just one. Luckily, there are mechanisms available with which to combine, or consolidate, two mortgages into one loan. But, the consolidation process may itself be tricky and the math may end up not making it worthwhile in the end.

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