Refinancing a mortgage can be tedious enough. Refinancing when you also have a home equity loan or a home equity line of credit? That’s even more mind-numbing because of a process known as resubordination.
An agreement to keep a second (or “subordinate”) mortgage in second position, even as the first mortgage is refinanced. The second mortgage is also known as a home equity loan or home equity line of credit.
Without a resubordination agreement, the second mortgage would move up into first position when the first mortgage is refinanced — something that the refinancing lender doesn’t want to happen. Some people remove the “re” and just call it subordination.
Why resubordination matters
When you have a mortgage, as well as an equity loan or line of credit, the latter is subordinate to the primary mortgage. That means it’s second in line. If the home were to go into foreclosure, the primary mortgage would be paid in full before a penny went to pay off the subordinate loan.
When you refinance, the new lender wants the primary mortgage to remain first in line, ahead of the equity loan. But that won’t happen unless the equity lender agrees to remain second in line. That’s where resubordination comes in. The process enables the refinancing first mortgage lender to make sure that it retains the first claim on the property.
5 things about resubordination
- Resubordination is the process of keeping the first mortgage in first place, ahead of other mortgages.
- When you refinance your first mortgage, the lender will insist on resubordinating the home equity loan or line of credit.
- The equity lender isn’t required to resubordinate.
- If your total mortgage debt is almost as much as the house is worth, the equity lender might say no to resubordination.
- If you run into a snag, one solution is to try a cash-in refinance.
Resubordination is easier now
Mortgage resubordination was a “huge problem” when property values and interest rates went down, says Rob Mercer, branch manager for First Home Mortgage in Bethesda, Maryland. “But as property values are going up and the demand for refinance isn’t as much, it seems that the subordination process has gotten a little easier.”
Typically, it takes two to three weeks to get the resubordination paperwork through, and it is likely to set you back $200 to $300.
Staci Titsworth, regional sales manager for PNC Mortgage in Pittsburgh, says, “The process itself and the paperwork requirements themselves are typically the same (from lender to lender). They need to see value, they need to see title and they need to see the terms of that new loan.”
Combined loan-to-value ratio
Total outstanding mortgage debt as a percentage of the home’s current market value.
Formula: (Amount owed in Mortgage A + Amount owed in Mortgage B) / Appraised value
Example: Alex owes $40,000 on the first mortgage and has a home equity line of credit with a $20,000 limit. The house is worth $100,000.
($40,000 first mortgage + $20,000 HELOC limit) / $100,000 = 60%
Also known as combined LTV, or CLTV.
Watch for these issues
Resubordination is a standard process and certain snags tend to crop up.
- Combined loan-to-value ratio is too high. If the combined loan-to-value ratio is higher than what your second-mortgage lender deems prudent, it could jeopardize your resubordination. Rising home values have helped mitigate this issue.
- New primary mortgage is riskier. The resubordination could be jeopardized if the equity lender perceives the new financing to be riskier than your current first mortgage. This could come about if you replace a fixed-rate mortgage with an adjustable-rate mortgage. Generally, the second-mortgage lender doesn’t want to see your risk profile go up.
- The process is outsourced. Larger banks typically have subordination departments. Smaller lenders sometimes hire a third party to approve or deny the resubordination request.
To smooth the process, get involved early, says Ron Felder, senior vice president for retail lending for Redwood Credit Union in Santa Rosa, California. “Contact the lien holder ahead of time and ask them about any requirements that they might have, so that they know upfront what those requirements might be,” he says.
Your options if resubordination runs into snags
- Ask the refinancing lender for a cash-out refinance and use the cash to pay off the second mortgage, thus avoiding the resubordination process.
- Request the refinancing lender to refinance both loans.
- Tell your HELOC lender to reduce the credit limit. This is practical only if you have borrowed well below the limit.
- Do a cash-in refinance to reduce your combined loan-to-value ratio.