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Refinancing and Home Equity Loans

Posted by  on Jan 25, 2010
 

A home equity loan or home equity line of credit (HELOC) can complicate your attempts to do a mortgage refinance. In some cases you may end up having your credit line reduced when refinancing. Here are some things to keep in mind before your refinance your mortgage loan.

Refinancing Has Gotten Tougher

Current mortgage rates are enticing to people wanting to refinance. Mortgage rates averaged 4.94% for a 30-year fixed loan at the beginning of November 2009. But many homeowners are having trouble refinancing their home loans despite the low rates. That's in part because of declining home values. In some parts of the country--particularly California, Nevada, and Florida--home values have dived so much that many people owe more on their mortgages than their homes are worth.

Credit Lines Get Cut

Another issue with refinancing in this economy is that many people have had their credit lines slashed by cautious lenders. Having your credit line decreased suddenly can be devastating if you depend upon it for home repairs and other expenses. Also, a decreased credit line can negatively impact your credit.

Refinancing Two Loans into One

You may think the simple solution is to do a refinance that combines your mortgage loan and home equity loan. The advantage to doing this is having one payment and possibly a lower overall interest rate. However, some mortgage lenders won't refinance a home equity loan or HELOC if you've had it less than a year.

Also, it's important to run the numbers to make sure refinancing both loans actually saves money. If you're already near the lowest mortgage rates on both loans, it may be better not to refinance.

Who's on First?

Refinancing a mortgage loan when a second lien is involved can be like listening to Abbott and Costello argue about "who's on first." If you try to do a home refinance but want to leave the home equity loan in place, the second lien moves up to become your first loan. That means the mortgage lender of the home equity loan or HELOC must agree to stay in second place to allow the first mortgage to be refinanced. Many mortgage lenders are reluctant to have their HELOCs be subordinate to the new first mortgage because they would be second in line to get paid if you ever defaulted on your loans.

Refinance Both Mortgages

If your mortgage lender refuses to have the home equity loan be second in a refinance, you may have to pursue refinancing both loans separately. Have a mortgage broker run the numbers to show you different options for refinancing both loans separately. Compare mortgage quotes from several lenders to see if it actually makes sense to refinance your home loan and home equity loan separately.

HELOCs usually come with adjustable mortgage rates, but there may be a period of time when you pay fixed interest. After that, the rate may rise significantly, so refinancing into a fixed-rate loan at current mortgage rates could be a wise move. Read through the terms of your HELOC before refinancing to see if there is a cap on how high interest rates can go.

Getting Approved for Refinancing

In the current economy it's tough for many people to get approved to refinance one loan. So if you want to refinance both loans you may face opposition. Good credit may or may not get you approved for refinancing. People with credit scores above 720 are more likely to be approved by mortgage lenders, but even some of them are facing difficulty getting approved.

Improve Your Chances of Refinancing

Do a comparative analysis of homes in your area to get an idea of how much your home is worth. You can compare home values online at various real estate sites or have a local real estate agent do this for you.

Doing a mortgage refinance when you have a second mortgage can be tough, but not impossible. Find a knowledgeable mortgage lender to improve your chances of getting approved for refinancing.

Summary

  • A home equity loan or HELOC can complicate attempts to do a mortgage refinance.
  • Many homeowners are having a tough time refinancing as home values have plunged.
  • Homeowners are having credit lines cut.
  • You may refinance your home mortgage and second lien into one loan.
  • You can choose to refinance only your first mortgage, but the holder of any second mortgage must agree to remain subordinate.
  • You can try to refinance both mortgages separately.

In general, it is usually most advantageous to combine a first and second mortgage into one loan if by doing so you don't incur the expense of mortgage insurance. If that's a consideration, you may want to leave your second mortgage in place or refinance it separately.

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