Refinancing to Current Mortgage Rates: What About Home Equity Loans?

Posted by  on Apr 01, 2010

The Greensboro, North Carolina News & Record reports that homeowners wishing to refinance to current mortgage rates are meeting roadblocks put up by their home equity lenders. Here's why this can occur.

Refinancing: Understanding Real Estate Liens

When you take out a home loan, your mortgage company encumbers the title to your property by recording a lien against it. Before your primary mortgage loan was approved, your lender obtained a title search to verify clear title to your property. Clear title means:

  • There are no unpaid mortgages against your property.
  • Property taxes and assessments are paid current.
  • There are no other title encumbrances (mechanic's liens, IRS liens, etc).

Your primary mortgage lender records its lien. When you take out a home equity loan, the lender also records a lien that is subordinate to your primary home loan (meaning that if you default, the primary lender gets repaid first). Your property's title report shows a sequence of liens:

  1. Property taxes and assessments (these always take precedence over other liens)
  2. Your first mortgage
  3. Your second mortgage (home equity loan or HELOC)

Refinancing requires ensuring that your refinance mortgage retains first position (excluding property taxes and assessments) in the sequence of liens.

Your Refinance and Home Equity Loans

When you refinance your first mortgage, you must do or provide one of the following:

  • Refinance for enough to pay off both first and second home loans.
  • Obtain a recorded subordination agreement from your home equity lender.
  • Obtain a recorded release of your home equity lender's lien (This is typically limited to mortgage rescue cases where home value has dropped below what is owed on the first mortgage loan and the home equity lender has little hope of being paid.)

Which option works best depends on individual circumstances including current home value, home loan balances, and how or if your home equity lender agrees to subordinate or release its lien.


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