How To Refinance A Second Mortgage

Many homeowners look to refinance their mortgage loans before they’re paid in full. Not only can you refinance your primary mortgage, but you can refinance your second mortgage too.

A second mortgage is a mortgage in addition to your primary mortgage loan. The main types of second mortgages that people may want to refinance include:

Each of these types of second mortgages has the potential to be refinanced for a lower interest rate. However, homeowners should consider whether the potential savings will outweigh the costs.

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 deciding which type of mortgage refinance 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 (or improve) 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.

A piggyback loan is a second mortgage or home equity loan that closes at the same time as the first mortgage. Homeowners sometimes get a piggyback mortgage to lower the loan-to-value (LTV) ratio of their first mortgage, enabling them to avoid having to pay private mortgage insurance (PMI). When the time is right to refinance their second mortgage, they almost always combine their original mortgage and the piggyback loan under one mortgage.

Steps To Refinance A Second Mortgage

Refinancing a second mortgage is like refinancing a first mortgage. The steps are nearly identical to a refinance.

Step 1: Do The Math

When deciding if you want to refinance your second mortgage, it’s wise to research whether the fees you’ll have to pay outweigh the money you’ll save. Standard fees may include closing costs, appraisal fees, and more. Speak with your current lender (also known as your mortgagor) about what fees you should expect, as every refinance is unique.

Sometimes, the costs of refinancing a second mortgage outweigh the benefits. For example, when you do the math, you might find that the fees are up to 6% of the total home loan. If you are planning on a $200,000 refinance, assume it may cost you up to $12,000. If you’ll save less than that when you refinance, it probably isn’t a great idea.

Step 2: Gather Information On Your Credit History And Debt-To-Income (DTI) Ratio

You should do a simple credit check before attempting to refinance your second mortgage, as well as evaluate your financial situation. Favorable interest rates are given to people with excellent credit and a low DTI ratio. If your credit score has fallen since you refinanced your home, you may want to spend a few months attempting to raise your credit score and decrease your DTI ratio.

Your lender may look at your other debts to determine your eligibility.

Step 3: Find Out If You Qualify

It’s essential to 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.

Step 4: Get Your Paperwork Organized

Finally, it’s 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.

The Bottom Line

There are several reasons to refinance a second mortgage. You might want to get favorable interest rates, lower your monthly total mortgage payment or switch mortgage companies. Refinancing a second mortgage can help you save money on your mortgage over time, but you should crunch the numbers to ensure that the fees associated with a refinance do not outweigh the benefits.

Refinancing a second mortgage is much like refinancing a first mortgage. You will need to do your research on different mortgagors, find out if you qualify, and then gather the necessary documents to complete your mortgage process. Of course, you should also improve your credit score and overall financial standing to increase your chances of getting approved at a favorable rate.