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Having a home equity loan or home equity line of credit can make refinancing your primary mortgage more complicated. That’s because the lender that issued your HELOC or home equity loan is seen as a secondary mortgage holder while you’re still paying off your primary mortgage.
But you can’t retire your old mortgage without either paying off the second as well or getting the secondary lender to accept what’s called resubordination. In that case, following a refinance of the primary mortgage, your home equity lender agrees to cede the first lienholder position priority back to the refinance lender. That jockeying is technically known as a resubordination, but if your home equity lender won’t cooperate, you have some other options as well.
Resubordination can be problematic these days
Resubordination is usually the path of least resistance, although it does take time and can involve extra fees. Keep in mind, however, that home equity lending has tightened during the pandemic and these days many lenders will simply not want to be bothered or want to take on additional risk.
If you want to go this route, before you can refinance your primary mortgage, your lender must submit a subordination package — all of the documents supporting the request — to the institution holding your home equity loan or line of credit. The second mortgage lender, if they want to go along, typically charges a few hundred dollars to review the package, and approval can take up to six weeks.
Options when resubordination is denied
If your home equity lender says no to resubordination but you still want to refinance, one solution would be to pay off the second loan, if you have the resources or possibly through a cash-out refinance.
However, you must retain at least 20 percent equity in the property after the cash-out refinance or you’ll have to pay private mortgage insurance. That extra cost could put the savings from a refi far away.
Another factor is that lenders have tightened credit amid the ongoing rate-driven refinance boom. Adding extra debt to your refinance may make lenders less keen to underwrite the new loan and if so your rate may be slightly higher.
But, on the plus side, thanks to those low rates, you may be able to save money by consolidating all your mortgages into a single loan if it works out.
One more route is to find a lender who will do a simultaneous first and second mortgage refinance. This way you can keep the second mortgage credit line and get a new first. A mortgage broker may be able to assist you with this and other types of refis that involve a second mortgage.