Can You Refinance A Second Mortgage? A How-To Guide

If you’re thinking about refinancing a second mortgage, you must be craving a change. Maybe you’re looking to leverage some more home equity to make some updates to your house. Or perhaps you’re not too enthused about the terms of your current loan.

Whatever the reason, the first question that pops into your head is probably, “Can I refinance a second mortgage?” The short answer is yes, it’s possible to refinance a second mortgage. But there are things to consider.

What Is A Second Mortgage?

Before getting into the why and how of refinancing a second mortgage, you need to know what one is if you don’t have one already. A second mortgage is a lien taken out against a property that already has an existing mortgage. The original home loan serves as the first mortgage, while the additional lien is the second mortgage. There are a couple different types of second mortgages.

Home equity loan: A home equity loan is an installment loan, which means you receive a lump sum upfront, and then pay it off over a set period of time. The amount of money you are loaned is set in the beginning and does not change over the course of the loan.

Home equity line of credit (HELOC): Unlike a home equity loan, a HELOC can be borrowed against, paid back and borrowed against again over and over. This is a type of revolving credit that allows you to borrow against your home equity like a credit card, borrowing from and paying off the balance multiple times within the term.

When Should You Refinance A Second Mortgage?

The question of when you should refinance a second mortgage is unique to each individual and their financial situation and goals. Here are a few reasons refinancing a second mortgage might make sense for you:

• Lower your interest rate: One of the most significant reasons people refinance any debt is to get a lower interest rate. You may qualify for a lower rate if the market interest rates are lower than when you initially borrowed the loan or your credit score has improved.
• Lower your monthly payment amount: In addition to lowering your interest rate, refinancing can also lower the monthly payment on your second mortgage. The lower payment could be a result of the lower interest rate or an extended payment term.
• Combine your first and second mortgages: Refinancing also gives you the opportunity to combine your first and second mortgage into a single loan with one mortgage term, payment and interest rate.
• Borrow money from your home equity: Another common reason people take out a second mortgage is to convert their home equity into cash. Refinancing that second mortgage would again allow you to borrow against your home equity.
• Switch from an adjustable-rate to a fixed-rate mortgage: Some second mortgages – especially HELOCs – have adjustable interest rates, meaning your rate and payment may change over time. Refinancing with a home equity loan can help you switch to a fixed interest rate with a stable monthly payment.

Pros Of A Second Mortgage Refinance

• You can get better loan terms: Refinancing can help you qualify for a better interest rate, a lower monthly payment or a different loan term on your second mortgage.
• You have flexible loan options: Since there are different types of refinance loans available as second mortgage options, you have plenty of flexibility when it comes to how you get and use your money.
• You may secure a fixed interest rate: Some second mortgages have adjustable interest rates, which create inconsistency in your payments. You can refinance to switch to a fixed interest rate with stable monthly payments.

Cons Of A Second Mortgage Refinance

• You have to pay fees. Unfortunately, all the benefits mentioned so far regarding second mortgages aren't free. There are a number of costs to refinance like closing costs and other fees, which can increase your loan amount or require an upfront payment. The amount you’ll pay depends on the type of second mortgage and the amount you’re borrowing.
• Refinancing can affect your credit score. Another drawback is that taking out a second mortgage or refinancing can temporarily reduce your credit score due to the hard credit pull (or inquiry) and new account on your credit report.
• You’ll have two mortgage payments. Mortgages are definitely a situation where two isn't better than one. When you have a second mortgage, you’re responsible for two mortgage payments. Refinancing only your second mortgage – as opposed to refinancing your first and second mortgages together – doesn't fix this problem. And if you fall behind on either of the two loans, you risk foreclosure.

How To Refinance A Second Mortgage

1. See If You Meet The Requirements To Refinance A Second Mortgage

Before you get too far, figure out if you qualify. Here are the typical requirements for refinancing a second mortgage:

• Credit score: You’ll need an acceptable credit score, meaning at least 620. In addition, some individual lender requirements may be higher.
• Debt-to-income ratio (DTI): To qualify for refinancing a second mortgage, your debt-to-income ratio (DTI) needs to be lower than 50%.
• Loan-to-value ratio (LTV): You’ll need at least 20% in home equity to qualify for a refinance. This means you'll need an LTV of 80% or less.

2. Determine Your Reason For Refinancing

Think about what you want to achieve by refinancing your second mortgage. Your goals will dictate what type of refinance option works for you and what questions to ask lenders.

3. Contact Your Current Lender

Once you have a good idea about what you want to accomplish with a second mortgage refinance, it’s time to talk to a lender. You can start with your current lender – either your first or second mortgage lender – but that isn’t required. It’s a good idea to shop around and find a lender that will offer the best rate.

4. Shop For Lenders And Loan Terms

When you’re shopping around for loans, choose a mortgage lender that’s right for your situation. Consider applying and speaking with a Home Loan Expert from our sister company, Rocket Mortgage^®. They will talk you through your refinance goals and the process of qualifying for a refinance.

5. Gather Documentation And Apply

Next, gather your documentation and complete your application. This usually includes information about your first and second mortgage, employment and income verification and other personal and financial information.

Depending on your lender, the application process itself may not take long. However, your lender may request additional information from you in the following days and weeks.

6. Close On The Loan

The underwriting process is next and, once that is complete, it’s time to close on your second mortgage. Just like any other home loan, you may be responsible for closing costs and other fees. Remember that until you’ve closed on your refinance, it’s important to keep making payments on your existing second mortgage. If you stop making payments, you may no longer qualify for your refinance loan.

Refinancing A Second Mortgage: FAQs

Now that you know the ins and outs of refinancing a second mortgage, let’s review some frequently asked questions to make sure you feel fully informed.

Can I refinance a second mortgage but not the first mortgage?

Yes, you can choose to refinance only your second mortgage without it affecting your original home loan. To do so, you would usually use a HELOC or home equity loan.

Is it harder to refinance a second mortgage than a primary mortgage?

It can be. Anytime you are borrowing money when you already have large loans (like a first mortgage) the process becomes more complicated. That said, a good lender can walk you through all the steps to make it as seamless as possible.

Can I roll my second mortgage into the first mortgage?

Yes, this would require taking out a new mortgage that would pay off both your existing mortgage and second mortgage. The result would be one larger loan with a new monthly payment, mortgage term and interest rate.

The Bottom Line

Refinancing a second mortgage is a possibility for those who qualify but be sure you know why you want to first. They come in many shapes and sizes, and knowing what you want to accomplish will help you choose the one that’s right for you. Ready to get started? Consider applying for a mortgage refinance with Rocket Mortgage.