As mortgage rates are at record lower positions, then one won’t be surprised to know that many homeowners are deciding to refinance their existing mortgages. This can be a relatively straightforward process for those who have sufficient home equity.
Other people may face some significant obstacles in their long search for lower monthly payments.
The existence of a home equity loan is one of the biggest barriers to refinancing. Home equity loans are second mortgages, what it means is that they are subordinate to your primary mortgage. When it comes to recovering losses in the case of a default then only subordination is important. If you have done a default on your loan and it is also foreclosed on, then when it comes to recover the amount of its loan the primary lender has to be paid back first. After that the first lender is paid and still there is any money left over from the sale of the home, then that money goes to the next lender in line, i.e. the second mortgage lender.
With fall in home prices, second mortgage lenders are taking big hits on foreclosures. They often fail to get enough money so that they can repay both loans on the property, when foreclosures are sold. If there is any home equity loan in play, it is probably written off entirely. To get a new home equity loan has become much more difficult due to this.
Unluckily, to refinance a primary mortgage has also been made more difficult due to this. After that you have refinanced your second mortgage goes to the front of the line for repayment after default. This will not be accepted by your refinancing lender, as they are loaning the higher of the two amounts. Consequently, what you will have to do is to resubordinate your home equity loan.
You can do resubordination by submitting a request to the home equity loan lender. To get the request approved it can take weeks. The lender may deny the request in some cases. In most cases, it happens that a refinance will not damage the position of the second mortgage lender, but still the resubordination will be denied. You may try to contact your lender to plead your case, but there may be no way to convince the lender to agree.
If this is the case then your only recourse is that you have to pay off your home equity loan and close the account in order to get the refinance completed. If you have at least an 80% loan-to-value ratio then this can be done with cash out refinance. Another alternate to this is that you could increase your payments on your home equity loan to pay it off as soon as possible. As there has yet to be any upward pressure on mortgage rates, so if you wait a few months or so to refinance probably will not make a huge difference in the interest rate you receive.
If you are choosing to refinance in order to get out of an adjustable rate mortgage (ARM), the good news for you is that you might have some time to work towards paying off your home equity loan. Though even if your ARM adjusts, you won’t likely get hit hard. Nowadays interest rates are so low that you will likely be able to lock in at a near equivalent rate with an annual reset.