How to Refinance a Second Mortgage

Refinancing a second mortgage can be done by adjusting the rate or term of the secondary home loan or combining it with your primary mortgage. 

Homeowners with two mortgages may consider refinancing their primary home loan or getting a second mortgage like a home equity loan. If homeowners fall behind on those payments, they may wonder if they can refinance a second mortgage. The answer is yes, and there are two ways to do it: refinancing the second mortgage on its own or combining it with the primary home loan. 

Here, we’ll walk through the process of refinancing a second mortgage, the pros and cons, and what you need to know.  

Can You Refinance a Second Mortgage?

Yes, it is possible to refinance a second mortgage, such as a home equity loan or home equity line of credit (HELOC). “You can either refinance just the second loan or combine it with your primary mortgage into one new loan,” says real estate investor Martin Boonzaayer, CEO of The Trusted Home Buyer.

Pros

• Possibility to lower monthly payment or interest rate
• Allows you to switch between a HELOC and a home equity loan
• Can simplify monthly payments by rolling the first and second mortgage into a single loan

Cons

• Must go through the application and closing process again
• Closing costs could outweigh the benefit of possible refinancing savings

How Does Refinancing a Second Mortgage Work?

You need to go through a specific process to refinance a second mortgage. Here’s what you can expect.

Assess Your Current Financial Situation

Refinancing can be a tempting option if you’re looking to lower your monthly payments. However, before refinancing, it’s important to look at your current financial situation. You must consider whether you have enough funds to cover fees and closing costs. It’s also crucial to consider the interest rate on your current mortgage and whether the current market rates offer more favorable conditions. 

Check Your Eligibility

To qualify for refinancing, you must meet a set of requirements. Typically, you’ll need to have:

• A credit score of at least 620
• A debt-to-income ratio that is 43% or less
• A minimum of 5-10% equity in your home (20% for a cash-out refinance)

Research and Compare Refinance Options 

You may be able to refinance your mortgage with your current lender, but you should also explore other options. Do an online search for the top mortgage lenders in your area and see what they offer. Then, compare terms, closing costs, interest rates and requirements to help you decide which lender is right for you.

Gather Necessary Financial Documents 

Your lender will likely ask for several financial documents when considering your application. This includes proof of income, such as your W-2, pay stubs or tax returns from previous years. You’ll also need to permit the lender to access your credit report and provide documentation from your first and second mortgages.

Complete a Home Appraisal

You must pay for an additional home appraisal since you’re applying for a new home loan. The lender will likely assign and schedule the appraisal for you. The purpose of the appraisal is for an expert to assess your property and determine its worth. Lenders want to ensure that they are not offering a loan amount higher than the determined worth of the home.

Submit a Refinance Application to the Lender of Your Choice

Once you’ve selected your lender and gathered your documentation, you can submit your application to the lender. Depending on your lender, you may be able to submit the application and documentation online, or you may be able to visit a lender’s physical location to apply. 

Review and Negotiate the Terms of the Refinance Loan 

Before going any further, you need to review the details of the refinance loan. Look for the interest rate that you’ve been approved for, as well as your repayment schedule. You should also be sure you understand all the fees that come with the loan so there are no surprises.

Pay Off the Existing Mortgage

While the lender reviews your application, stay current on your existing mortgage. During the time between applying for a loan and closing on it, changes to your credit history can cause an issue. If you don’t stay current on your payments, your lender might see that as a red flag and deny your application or delay your closing.

Close on the New Refinance Loan 

As with your first and second mortgage, you must close on the new loan, including reviewing and signing. You should be sure that the information on these documents accurately reflects the interest rate and terms you were offered because this is a binding contract. You’ll also pay the closing costs at this time. 

Begin Making Payments on the Second Mortgage

After closing on the new loan, you begin to make payments based on the new loan’s terms. The lender pays off the previous mortgages that you refinanced. If you only refinanced the second mortgage, you’ll need to ensure you’re still paying off the first mortgage. Familiarize yourself with the new payment amounts and schedules to ensure you are not at risk of defaulting on the loan.

Second Mortgage Refinance Options

Most mortgage lenders who offer second mortgages, such as home equity loans and HELOCs, also refinance those secondary home loans. For those seeking a HELOC and looking for a fixed interest rate, Benzinga recommends Figure. It has a 100% online application process, no prepayment penalties, and offers credit limits up to $400,000. 

When Does It Make Sense to Refinance a Second Mortgage?

“If refinancing gets you a lower rate or helps consolidate debt, it might be worth it,” says Boonzaayer. “Otherwise, it might not be worth the hassle.”

You should refinance a second mortgage if you’re struggling to maintain monthly payments, or if interest rates have dropped significantly. Keep in mind, you’ll have to pay closing costs and undergo another home appraisal before you’re approved for refinancing. 

Why You Should Trust Us

Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.

For this story, we worked with real estate investor Martin Boonzaayer, CEO of The Trusted Home Buyer. 

Frequently Asked Questions 

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