Working with a 2/28 mortgage
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 Dear
Dr. Don,
I purchased a home a year ago. I did an 80/20 financing. The mortgage I chose was a 2/28 ARM. The housing market was doing quite well at the time. Since that time I am afraid the value of my home has dropped.
My questions are: Can I subordinate my first and refinance it when it is time for the loan to adjust or am I stuck? Is this possible without touching the second mortgage?
--David Duover
 Dear
David,
You can't subordinate your existing first mortgage to another mortgage.
The ability to refinance your current first mortgage while keeping
the second in place depends on the terms of the existing second
mortgage, but it is likely you can do that if the second is in no
worse a credit position than the mortgages are under the existing
first mortgage. Review the loan documents and/or talk to the lender
about it.
Bankrate's glossary defines
a subordinate loan as a mortgage whose priority is below that
of another mortgage; i.e., a second or third mortgage or a home
equity loan. In foreclosure the first mortgage lender's security
interest in the property gets paid off before the second mortgage
holder receives any payments.
A 2/28 ARM is typically used in mortgage financings
when the homeowner doesn't have a great credit rating. The idea
is to build up the homeowner's credit history, and by doing that
his credit score, so he can refinance after the initial two years
are up. There is normally a prepayment penalty associated with a
2/28 ARM, making it very expensive to refinance in the first two
years of the loan.
Because you're only one year in on your 2/28 ARM,
you've got some time to evaluate your options. Make sure you understand
the pricing index and spread on your current first mortgage so you
have an idea how to compute the new interest rate on the reset date.
Monitor your credit report and credit score to see if your credit is improving and make sure you stay current on all of your loans. Find out if you can keep the second mortgage in place while refinancing the first mortgage.
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