Should I Refinance My 2nd Mortgage?
Many homeowners are not clear on whether or not they should be refinancing their existing second mortgage. It is important that homeowners realize that refinancing is an opportunity to renegotiate your mortgage. There is a couple of issues you must address before committing to a 2nd mortgage refinance. If you can lower your monthly payment without breaking the bank to pay for the lending fees then it would be difficult to argue against the choice to refinance. Some companies will even pay for your closing costs, so at the very least it is worth looking into. In most cases a prudent homeowner would refinance their credit line once they were done using it. The truth of the matter is that HELOCs are revolving accounts like credit cards, so if you do not need to reuse the line, you will likely benefit from the fixed rate and payment that come with the amortization schedule of the installment loan.
Do You Qualify for Refinancing?
- Do you qualify for refinancing? Most lenders will want an appraisal to document that your home as at least 20% equity left in your home after your new second mortgage. That means that when you add your 1st and 2nd loans together and divide that sum by the property value that you are at or below 80% loan to value. When speaking with loan agents it is important that you discuss "loan-to-value" in the beginning so you do not waste your time.
- Is your credit score high enough for a subordinate loan? Most 2nd mortgage lenders are looking for a 700 or 720 fico. Yes there are lenders that offer 2nd loans to people with scores between 580 and 699, but you will need a company like ours that offers a free service to locate appropriate lending companies that have specific niches. If your fico score falls below 600, you will need more equity to qualify for the refinance option.
- Do you have enough income monthly and can you document it with tax returns, W2's and pay-stubs. Most 2nd lenders are looking for a debt to income ratio below 40%. Most big banks and lending sources will not want to take a risk on 2nd mortgage refinancing so they will set lofty requirements to mitigate their default risks. This is why you should start by researching companies that actually specialize in home equity programs. Honestly most of the big banking institutions will tell that 2nd liens are not worth their time because the loan amounts are minimal and the risks are greater than traditional 1st liens.
- How much money will you save with a 2nd mortgage refinance? Obviously there has to be a benefit for your time and to justify the cost of refinancing. If the new loan will save you hundreds or thousands of dollars a year, then it likely makes sense to refinance your 2nd mortgage. If refinancing can eliminate years that you have to pay interest on the loan, then that could save you a lot of money as well. For example, if you have a 20 or 25 year loan and you trim the term to 10 or 15 years, then you could eliminate thousands of dollars in interest with the shorter term. Before making big plans, we suggest discussing your eligibility and affordability with a licensed loan officer. Make sure that you review the Good Faith Estimate and the other disclosures so that you can feel good about another financial commitment involving your house.
When to refinance credit lines and 2nd mortgages
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