Can I Refinance My Home Equity Loan With a New Second Mortgage?

By Gina Pogol
Mortgage Credit Problems Columnist

Todd Asks: Dear Gina, I have had a home equity loan for three years and think I could get a much better interest rate now. I no longer have the bad credit I did when I got that loan and I made my payments on time every month. Is it possible to refinance a second mortgage and leave my first mortgage alone?

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Gina Says:

Dear Todd,

Refinancing your second mortgage is not much different from refinancing your first mortgage. You have to apply and present requested documentation to a mortgage lender. Your income, credit, and property will be evaluated and you hopefully get an approval. Without bad credit, lenders look more kindly on your application than they did in the past. Refinancing a second mortgage is much less expensive than refinancing a first mortgage--the lender fees, title insurance, and other costs are considerably less--some lenders even offer no-cost second mortgage refinancing.

Refinancing Tougher Today Even Without Bad Credit

Refinancing your second home loan may be more difficult than your first if your home is in an area where property values have fallen. If you owe more than 80-90% of your home's current value, there may be very few lenders willing to offer to refinance your second mortgage.

The reason is that the holder of your first mortgage gets repaid first if you default on your mortgage; the holder of the second only gets paid if there is enough home equity. In many cases, there is nothing left after a distressed sale and attorney costs from the first lender--and the second lender loses everything or nearly everything. So in today's climate, refinancing second mortgages with good credit or bad credit is much harder than it used to be.

FHA May Offer Better Deal than Bad Credit Mortgage

You probably should look into combining both of your mortgages into a new first mortgage--if you had bad credit in the past but do not anymore, chances are good that you could do better today than the current interest rate on your first mortgage. And FHA allows you to refinance your first and second mortgages to 96.5% of your home's value (as long as your new loan falls within FHA loan limits for your area). If your second mortgage is a home equity line of credit (HELOC) and you have tapped it recently, your new mortgage would be considered a cash-out refinance and you'd be limited to 85% of your home's value.

You may also be successful in talking to your bad credit second mortgage lender--in theory, it's already in the risky second position, and they may be willing to offer you a safer loan.

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