Second Mortgage Refinancing: Your Options

If you are a homeowner with a second mortgage, you might ask yourself the question, “How can I make the most of my home’s equity?” With 70% of American homeowners in a 30-year fixed rate loan, most homeowners are trying to figure out a way to get themselves in a better position financially as 2023 is coming to a close. There are ways to optimize your financial situation and create better terms for your mortgage by refinancing your second mortgage. By doing this, you could unlock a way to streamline your mortgage payments, get better loan terms, and secure a lower monthly payment. With so much uncertainty surrounding the housing market, is this the best time to refinance your second mortgage? In this article, we’ll discuss your options in refinancing your second mortgage, if mortgage rates will go down in 2023, and the costs involved in the process!

What Is a Second Mortgage?

A second mortgage is a loan made in addition to the homeowner’s primary mortgage. Homeowners use these mortgages for several reasons, including for things like paying college tuition, buying a new car, or buying a second home. A second mortgage typically has slightly higher interest rates than first mortgages but will carry a much lower interest rate than personal loans or credit cards. Second mortgages are usually paid in the form of a lump-sum payment made out to the homeowner at the beginning of the loan and, like their first mortgage, is paid back over time at either a fixed or variable rate. The second mortgage loan must be paid back before any additional mortgages can be taken out against their home’s equity. 

Will Mortgage Rates Go Down in 2023?

As with any market, it’s tough to determine whether or not we will see a drastic change in mortgage rates for the remainder of 2023. There are plenty of experts who are predicting that there will be a slight decrease in the mortgage rate, somewhere around the 6.5% range. Fannie Mae, one of the major mortgage lenders in the country, is forecasting that the mortgage rate could drop from its current state of 6.78% to somewhere around 6.3% in the fourth quarter of the year. On the other hand, some forecasters predict that mortgage rates will continue to rise gradually towards the end of 2023 and into 2024.

Factors like inflation and the Federal Reserve will be the main determinants of whether or not mortgage rates will go down. Inflation has slowed down, but not by much, and the Fed has kept its interest rates level for the time being. These factors could end up forcing the housing market to slow down as well, leading to a decrease in the mortgage rate. However, the Economy Forecast Agency predicts that mortgage rates will continue to increase throughout the rest of 2023, along with the Fed rate, which they are predicting will go up at least another .25% before the year is over. Their predictive model shows that the 30-year fixed mortgage rate will peak in November of this year at 7.75% before dropping back down in December. 

Is 2023 a Good Time To Refinance a Second Mortgage?

With interest rates where they are and the uncertainty of the Federal Reserve’s plans for the remainder of the year, 2023 is probably not the best time to refinance a second mortgage. Uncertainty surrounding whether or not the interest rates will fall and the Fed rate is cause enough to stave off refinancing that second mortgage for now. However, if your second mortgage carries a higher interest rate than the current rates, this could be a good opportunity for you to take advantage and get a better rate on your second mortgage. For the most part, though, it’s probably best to wait until after the start of 2024 to refinance.

Second Mortgage Refinance Options

If you have a second mortgage that you are trying to refinance, there are only a couple of options for you to choose from. There could be a number of reasons as to why you need to refinance your second mortgage. You could want a lower rate and monthly payment, or perhaps you want to borrow more money from your home’s equity for a home improvement project, or maybe you want to consolidate your mortgages to get a lower payment. Whatever the reason is, know you have options. In this section, we’ll discover what those options are and weigh the benefits and the downsides of each of them. 

Refinance Your Second Mortgage with a Traditional Home Equity Loan

The first option we will look at is refinancing your second mortgage with a traditional home equity loan. This is a great option for those looking to lower their monthly payment on their second mortgage or get a better interest rate on their loan. You could also consider refinancing your second mortgage to get shorter terms on your loan, move from an adjusted rate to a fixed rate, or a higher amount that can help you complete your projects or your goals. 

Pros

Refinancing with a traditional home equity loan allows you to get a fixed interest rate on your refinance, which prevents any future interest rate fluctuation and gives you a set amount for your monthly payment. This also allows you to make your payments over a fixed term with regular payments every month, as well as giving you the ability to move on from high-interest debts, keeping your budget manageable and in one payment. 

Cons

The downside to refinancing your second mortgage with a traditional home equity loan is that you will have to pay the closing costs, just like you would with any other mortgage. Additionally, once you’re in that fixed-rate loan, you can’t take advantage of any future interest rate decreases that may happen.

Refinancing Your Second Mortgage with a Home Equity Line of Credit (HELOC)

Another option for refinancing your second mortgage is with a Home Equity Line of Credit or a HELOC. A HELOC is a line of credit with an amount that you can use that is based on your home’s equity. Instead of a standard loan, the HELOC acts like a credit card. This means the maximum credit limit is based on your equity amount. For instance, if your home has $100,000 in equity, you can take out a HELOC with a borrowing limit of $80,000. With a HELOC, you pay back only the amount that you borrow. You pay this back in monthly installments, with interest, of course. 

Pros

Refinancing your second mortgage through a HELOC gives you several advantages. First, it provides you with the flexibility to take funds as you need during the draw period. This gives you the ability to have a much greater financial adaptability. Another positive of the HELOC is that they have a variable interest rate. If the interest rates are low, your initial payments with the HELOC will be lower. Additionally, during the draw period, you are only required to pay interest for the amount you borrowed rather than for the whole amount of the loan. 

Cons

While the HELOC offers several great benefits, there are some things to be aware of when choosing this option to refinance your second mortgage. One of the things to be mindful of when you choose a HELOC is that the interest rate will be volatile, leading to higher payments in the future if interest rates rise. While the flexibility of the HELOC is a great benefit, it can also lead to overspending. This means more debt and more financial strain. Additionally, with a HELOC, the draw period does end, and you’ll enter the repayment period, where you must pay both principal and interest, resulting in higher monthly payments.

Second Mortgage Consolidation

The last option for refinancing your second mortgage is to consolidate your second mortgage into your primary mortgage. Having two mortgages can be highly stressful, so when considering a refinance on your second mortgage, consider consolidating your second and primary mortgage.

Pros

By consolidating your mortgages together, you’ll be able to have just one monthly payment instead of two, and it should be considerably less than paying for both loans. This option can also offer a lower interest rate since you’ll move on from the second mortgage.

Cons

When consolidating your two mortgages, make sure you take into account the fact that you might be extending your repayment period and increasing the total amount of interest over the life of the loan. There are also costs that are involved with refinancing, including various fees and closing costs, as well as the risk that you may be reducing your access to your home’s equity.

Can You Refinance a Primary Mortgage When You Have a Second Mortgage?

Yes, it is possible to refinance a primary mortgage when you have a second mortgage. However, the process can sometimes be complicated due to the second mortgage. When you have a primary mortgage that you want to refinance and a second mortgage, there are two options that you will generally have to choose from. You can choose to consolidate both of your loans into one loan, or you can choose to go the path of the subordination agreement. Let’s take a look at an example of both of these options.

Consolidation

By consolidating both your primary and second mortgages, you’re choosing to streamline your payments and potentially get a lower interest rate for the entire value of the debt. If your primary mortgage has a balance of $200,000 and your second mortgage has a balance of $50,000, your consolidation loan request should be around $250,000 or even a little more due to closing costs. Once approved and payment is disbursed, both loans will be paid off, and you will have a new mortgage for the amount you requested at a much more favorable interest rate and perhaps with better terms.

Subordination Agreement

In a subordination agreement, you have to work with both lenders of your mortgages to modify their positions. Your primary mortgage lender will prefer to hold the first lien position, which means they will be the first to receive repayments in the event of a foreclosure on your home. They will not want to hold the subordinate position. The second mortgage lender would have to agree to be the subordinate lien position. For example, if you have a primary mortgage of $250,000 and a secondary mortgage of $50,000, and you want to refinance your primary mortgage to get better terms or a better interest rate, you have to send the lender of your secondary mortgage a subordination agreement from the primary mortgage lender. Once accepted, you’ll still have both mortgages and the same amount of debt, but your primary mortgage will have a better rate and terms.

Can You Refinance Your Primary Mortgage and Your Secondary Mortgage At The Same Time?

Yes, it is possible to refinance both your primary and your second mortgage at the same time. This can be accomplished by replacing both with a new mortgage loan. Is this different from just consolidating both mortgages together? Yes! Here’s how:

Let’s say you have a primary mortgage with a balance of $225,000 and a second mortgage with a balance of $50,000. Your primary mortgage has an unfavorable interest rate, and you want to take more control of your financial situation. You decide to apply for a new mortgage worth $275,000 with much better terms and a favorable interest rate. Once the new lender goes through the process and gets your new mortgage approved, you will go through the rest of the approval and closing process, which can include closing costs and other associated fees. Once approved and the funds are disbursed, they will go to their respective lenders, and both of your previous mortgage accounts will be closed. This gives you a new loan at a much better rate and perhaps a lower monthly payment, saving you money in the long run.

Costs Associated With Refinancing a Second Mortgage

Like any mortgage process or refinancing, various costs and fees are included when you refinance your second mortgage. This section will examine some of the costs and fees associated with your refinance.

Closing Costs

With any mortgage or mortgage refinance process, there will be closing costs and other fees associated with the transaction of the loan. These varying costs include:

• Origination Fees: The lender charges these fees to process your second mortgage refinance application.

• Survey Fees: If your property requires a survey, you’ll have to pay these fees.

• Credit Report Fees: These are fees to get the homeowner’s credit report, used to help the lender determine creditworthiness and interest rates on the mortgage.

• Recording Fees: These are fees charged by local governments for recording the new mortgage documents.

• Underwriting Fee: The underwriting fee covers the cost of evaluating and verifying your loan application.

• Appraisal Fees: These fees cover the cost of a professional appraisal to determine the property’s current market value.

Points

Discount points, or "points," are fees paid to the lender at the closing in order to reduce the mortgage's interest rate. A point, typically 1% of the total loan amount, can help reduce the interest rate by a particular percentage. If homeowners want to live in the property for a longer amount of time and want to save more interest over the course of the loan, paying these points upfront makes more sense.

How To Find a Mortgage Refinance Company

If you are looking at refinancing your second mortgage, it’s important to fully understand your options before making a crucial decision. Make the right choice with your second mortgage refinance and utilize the database of mortgage experts and companies in the directory provided by Expertise.com. They’ve created a database of the best mortgage refinance experts and the most trustworthy companies to ensure you get the best information and the most favorable rates for your second mortgage refinance. When you need experts to help you with these important decisions, don’t settle for the first offer you see. Contact the experts by using the database at Expertise.com.