How to Refinance a Second Mortgage

Homeownership is hard. Maybe you’ve already taken out a second mortgage, or you’re considering it as an option. Either way, you’re probably wondering if it’s possible to refinance a second mortgage. It is possible, but there is important information that you should know. 

Can You Refinance a Second Mortgage?

Yes, it is possible to refinance a second mortgage. There are a couple of options. You may be able to refinance a first and second mortgage into a single mortgage. Or, you might opt to only refinance the second mortgage. 

10 Steps to Refinance a Second Mortgage

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

1. 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 take a look at your current financial situation. You need to consider whether you have enough money saved up to cover any fees or closing costs that you might run into. It’s also crucial to consider the interest rate on your current mortgage and whether the current market rates offer more favorable conditions. 

2. Check Your Eligibility

To qualify for refinancing, you’ll have to 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 20% equity in your home

3. Research and Compare Refinance Options 

You may be able to refinance your mortgage with your current lender, but that doesn’t mean you can’t look elsewhere. Do an online search for the top mortgage lenders in your area and see what they have to offer. Then, compare terms, closing costs, interest rates and requirements to help you decide which lender is right for you.

4. Gather Necessary Financial Documents 

Your lender is likely to ask for several financial documents when considering your application. This includes proof of income, which could be 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.

5. Complete a Home Appraisal

Since you’re applying for a new home loan, you’ll need to pay for an additional home appraisal. 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 make sure that they are not offering a loan amount that is higher than the determined worth of the home.

6. 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. 

7. 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 of the fees that come with the loan so there are no surprises.

8. Pay Off the Existing Mortgage

While the lender is reviewing 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.

9. Close on the New Refinance Loan 

Just as with your first and second mortgage, you need to close on the new loan, which includes 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. 

10. Begin Making Payments on the Second Mortgage

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

When Should You Refinance a Second Mortgage?

Refinancing a second mortgage might not be the right option for everyone, but it makes sense in some situations. Here are some examples:

• If you want to simplify your monthly payments by combining the first and second mortgages into a single loan.
• If you qualify for a lower interest rate now than you did with your previous mortgages and want to lower your interest rate. 
• If your second mortgage has a variable interest rate and you want to lock in a fixed interest rate.
• If you want to extend your loan period to lower monthly payments. 
• If you want to switch from a home equity loan to a home equity line of credit (HELOC) or switch from a HELOC to a home equity loan. 

Pros and Cons of Refinancing a Second Mortgage

Refinancing can be a good option for many people. However, to make a fully-informed decision, it can be helpful to consider the pros and cons.

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
• Possible credit score impact

Compare the Best Mortgage Refinance Companies from Benzinga’s Top Providers

Finding a lender to refinance with can be overwhelming. Here are a few qualified lenders to get you started:

How Do I Know If I Should Refinance a Second Mortgage?

Knowledge is powerful, so it’s good to know that refinancing a second mortgage is possible. The best way to determine if it’s right for you is to compare your current payments to the costs of refinancing. You should also consider your current financial situation and the option that best meets your goals.

Frequently Asked Questions