Dear Dr. Don,

My first mortgage is a 5/1 adjustable-rate mortgage that will reset in December 2009. I also have a home equity line of credit as a second mortgage.

The interest rates are low on both mortgages (4.375 percent and 4 percent). I have contemplated refinancing the ARM with a fixed-rate mortgage because I plan to stay in this house for many years. I have excellent credit scores and a secure job, and can afford the payments.

The only problem is that the homes in my community have lost value and the home equity lender will not allow subordination. It seems the only alternative is to try to pay off as much of my home as I can and keep my current mortgage. Do you have any suggestions or alternatives?

— David Dilemma

Dear David,

When you refinance a first mortgage and there’s also a second mortgage outstanding, the second mortgage lender has to agree to subordinate its loan to the new first mortgage.

As you found out, the second mortgage lender’s refusal to agree to subordination can derail the refinancing because the new first mortgage lender won’t accept being second in line in the event of foreclosure.

A lender’s refusal to agree to subordination is very frustrating to homeowners because, as long as you’re not doing a cash-out refinancing, the second mortgage lender is likely to be no worse off then it would be if there was no refinancing.

In fact, the second lender could be in a better credit position if the first mortgage refinancing resulted in a lower monthly payment. That would increase the probability that the homeowner could afford the mortgage payment on the second mortgage.

Paying off your second mortgage would get you out of this situation. But from what you’ve said, that isn’t feasible with a cash-out first mortgage because of the decline in property values in your area.

Additional principal payments on the second mortgage would work toward that goal, but it’s not likely to get you there before the reset date on your 5/1 ARM. Fortunately, the reset rate on that 5/1 ARM is likely to remain low between now and December. With an annual reset, that would give you close to two years for housing prices or mortgage balances to improve to the point where you can refinance.

I’m not a real fan of this solution, but a loan against your retirement plan assets might raise enough money to pay off the second mortgage, leaving you free to refinance. There’s a host of reasons not to do it, like repaying your retirement account with after-tax dollars. Talk to a tax adviser before taking this approach.

The good news is that there’s no real upward pressure on short-term or long-term interest rates. The bad news is that by the time housing prices start to recover, the current low interest rate environment is likely to be history.

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