A Second Mortgage Can Make It More Costly to Refinance

A Home Buying Article Contributed by Elizabeth Fox-Wise

Your Refinance Lender Calls Your Refinance a Cash out Because of Your Second Mortgage

If you go to refinance your home mortgage, you might be surprised to find out that it is more expensive because of your second mortgage.

A refinance mortgage typically gives a lower rate if the mortgage refinance is taken only for the amount of the original mortgage loan. If you refinance your home and want to take extra cash out of it for another purpose, you will often pay a higher refinance mortgage rate because of it.

What many people do not realize, is that any other debt which has been attached to the mortgage and is part of the refinance package, makes the mortgage refinance get classified as a cash out refinance and raises your interest rates. This includes home improvement loans, home equity loans and second mortgages.

You Need Enough Equity in Your Home, after Second Mortgage is Taken

Another problem that you might run into when you go to refinance your mortgage is that the combined value of the first and second mortgage leaves you with little or no equity in your home.

During the 2000s, with the record low interest rates and the eager mortgage lenders, many homeowners were allowed to take combined mortgage loans equal to 125% of the value of the home. With a starting figure already above the value of the home, it will take quite a few years before these homeowners will start to see equity in their homes.

If the refinance mortgage (including first and second mortgage) has a balance that exceeds 75% of the value of the home, then you will probably have to pay a higher rate and an extra premium.

You Could Choose to Refinance First but Not Second Mortgage

Another option for refinancing is to refinance only your first mortgage and not your second. In this case, you second mortgage stays where it is and becomes subordinate of your new refinanced first mortgage. In this case, the refinance mortgage lender will look at your Total Loan to Value (TLTV). If your total loan to value is greater than 90% of the value of your home, you will probably not be approved for refinancing. You will have to pay your second mortgage down some before the mortgage lender will consider the refinance.

While having a second mortgage does not mean that you will be unable to refinance your mortgage ever, it does mean that it might be more difficult and more costly than it would have been without a second mortgage on the property.

A second mortgage is a good way to access cash using your home as collateral. However, always keep in mind how much your home is worth and your ratio between equity and debt. Carrying debt that is equal to 125% of the home equity is very risky. Should you get into financial trouble and have to sell the home, you would end up still having mortgage loans to pay off even after the home is gone.