Many homeowners choose to refinance a mortgage before it is paid in full. Many homeowners may not know that it’s possible to refinance a first or second mortgage. Refinancing a second mortgage is generally not that different from refinancing a first mortgage, but some of the reasons homeowners choose to refinance again may differ. For example, they may not want to cash-out refinance their second mortgage.
The main types of second mortgages that people may want to refinance include:
- A piggyback loan
- A HELOC
- A home equity loan
Each of these types of second mortgages has the potential to be refinanced for lower interest payments. However, homeowners should consider whether the potential savings will outweigh the costs.
When Should You Refinance A Second Mortgage?
There are many circumstances under which it could be a good idea to refinance. However, no two situations are the same. Therefore, be sure to speak with a mortgage professional before deciding to refinance your second mortgage.
There are relatively low-interest mortgage rates available to the general public. Many people choose to refinance a second mortgage to take advantage of interest rates that are lower than when they initially took out their second mortgage. Additionally, their financial situation may have improved, and they could qualify for lower interest rates. Low-interest mortgage rates are a common reason that people refinance a second mortgage.
To receive a lower interest rate on a second mortgage refinance, a person needs to maintain or improve their financial standing, including their credit score. A person with strong credit and consistent mortgage payments will have a better chance of getting a more favorable refinance interest rate than someone with average financial standing.
Finally, people who can switch from a variable interest rate to a fixed-rate might want to refinance their second mortgage. This is most common with piggyback loans.
A piggyback loan is a second mortgage or home equity loan that closes at the same time as the first mortgage. Homeowners sometimes get a piggyback mortgage to lower the loan-to-value (LTV) ratio of their first mortgage, enabling them to avoid having to pay private mortgage insurance (PMI). When someone who has a piggyback loan refinances their second mortgage, they might combine their original mortgage and the piggyback loan under one mortgage.
Steps To Refinance A Second Mortgage
Refinancing a second mortgage is like refinancing a first mortgage. The steps are nearly identical to a refinance.
Step 1: Do The Math
When deciding if you will refinance your second mortgage, it’s wise to research whether the fees you will have to pay to refinance will outweigh your savings. Standard fees may include closing costs, appraisal fees, and more. Speak with your mortgagor about what fees you should expect, as every refinance is unique.
Sometimes, the costs of refinancing a second mortgage outweigh the benefits. For example, when you do the math, you might find that the fees are up to 6% of the total loan. If you are taking out a $100,000 refinance, that is up to $6,000. If you plan to build those fees into your refinance, it would be a $106,000 loan, plus interest that you’ll accrue over time.
Step 2: Gather Information On Your Credit History And Debt-To-Income (DTI) Ratio
You should do a simple credit check before attempting to refinance your second mortgage, as well as evaluate your financial situation. Favorable interest rates are given to people with excellent credit and a low DTI ratio. If your credit score has fallen since you refinanced your home, you may want to spend a few months attempting to raise your credit score and decrease your DTI ratio.
Your lender may look at your other debts to determine your eligibility.
Step 3: Find Out If You Qualify
It’s essential to talk to an expert about whether you are eligible for a refinance on your second mortgage. Your lender might look at your property value to ensure it meets LTV ranges. They will also look at your credit score and other financial documents to decide if you are eligible for a refinance.
Step 3: Get Your Paperwork Organized
Finally, it’s crucial to get your paperwork organized. Your lender will need to see your current mortgage, especially if your second mortgage is through a different company than the one you are working with. It would help if you also planned to have the paperwork from your first mortgage.
If you are hoping to get a lower interest rate, you may want to keep an eye on your credit history and have any documentation of any hard inquiries. You should also have documents outlining other loans you have, including student loans, auto loans, and more.
It would help if you also had your W-2 or other income statements available. Your income will help prove your DTI ratio and help you get qualified for a lower interest rate. You should also speak with your lender to see if it has any unique documentation requirements or if your situation requires other information.
There are several reasons to refinance a second mortgage. Someone might want to get favorable interest rates, lower their monthly mortgage payments, or switch mortgage companies. Refinancing a second mortgage can help you save money on your mortgage over time, but you should crunch the numbers to ensure that the fees associated with a refinance do not outweigh the benefits.
Refinancing a second mortgage is much like refinancing a first mortgage. You will need to do your research on different mortgagors, find out if you qualify, then do the work to gather the necessary documents to complete your mortgage process. Of course, you should also improve your credit score and overall financial standing to increase your chances of getting approved at a favorable rate.