How Refinancing Works When a Home Have Equity Loan?

Homeloan equityRefinancing is a way to lower the monthly mortgage payment by using a loan with a lower interest rate to pay off the existing mortgage. Refinancing with a home equity loan makes the process slightly more complicated, but refinancing is possible. Before refinancing with an equity loan in place the homeowners must decide whether they want to secure their mortgage and equity loan into a single mortgage but the homeowners should refinance only the first mortgage or refinance only the equity loan.  Homeowners should consult their financial adviser to determine which option best suits their finances. Refinancing a home that has an equity loan along with a standard first mortgage is a bit more challenging than typical refinancing. Equity loans are designed to be second mortgages, recorded after the first or purchase money mortgage loan. However, when refinancing a current first mortgage, a homeowner must receive cooperation from her home equity lender if she wants to keep her home equity loan. A home equity loan is a form of credit where a home is used as security to secure repayment of the loan. The sizes of home equity loans and lines of credit which can be in the tens of thousands make them a helpful source of funds for homeowners facing major purchases like education expenses, home repairs, renovations and medical costs.

  • Purposes of refinancing: –

 Usually homeowners refinance mortgage loans for two primary reasons. First when the mortgage rates decline below a current loan of homeowner, some will replace their present loan with a new lower rate mortgage, saving money with a smaller monthly payment. Second needing funds for improvements, investments, education or other important purchases of homeowners often choose for cash out refinance by increasing their former mortgage loan balance but generating new money for themselves.

  • Basics of refinancing: –

Mortgage refinances involve a repeat of the entire process of application because the borrower is requesting a totally new loan. All income, asset, credit and employment information must be verified, and a fully documented appraisal must be performed. The fair market value (FMV) of home that is determined by the appraisal is critical to a successful refinance. While refinancing is not a problem during a rising real estate market but during a period of declining values it can be challenging. The credit and financial stability of homeowner should be equal to or better than his situation when the existing mortgage loan was approved.

  • Borrower options: –

Refinancing a mortgage when a home equity loan also exists may leave homeowners with few options. Mostly depends on the documented fair market value of home which may determine the likelihood of a reasonable willingness of the lender executing a subordination agreement and permitting the home equity loan to remain in second position. Lenders on the other hand have at least two options: subordinate and allow the home equity loan to continue as is, or command payoff by the homeowner. Borrowers continue the option to pay off the outstanding balance of the home equity loan.  

  • The homeowners should apply for a refinance loan with a mortgage lender. They should try their current lender first because it already has the information that is necessary to underwrite another loan and might give them a good deal to keep their business. Generally if homeowners are refinancing a first mortgage and a home equity line into a single mortgage then they want as low a loan-to-value ratio as possible because interest rates increase as loan-to-value ratios get higher and the loan becomes riskier for lenders. Eighty percent or lower loan-to-value is ideal to get the best rates. Depending on the homeowner’s credit, financial profile and lender they may not be approved for a refinance with a high loan-to-value ratio. If homeowners have the funds available then they may benefit from paying down their line of credit before applying for a refinance loan.
  • The homeowners should request that their equity loan lender subordinate its position if they are refinancing only the first mortgage. Subordination allows the homeowner’s refinance lender to move into first position, ahead of the equity lender. First position gives the lender the first claim on sale proceeds if homeowner default on his loan and the lender is forced to foreclose. Subordination is often a lengthy process so homeowners should apply early to allow enough time for their request to work through the lender. Refinancing only the equity loan is similar to refinancing the first mortgage.
  • Homeowners have to provide the lender with any documentation necessary to underwrite the loan such as bank statements, tax returns and pay receipts.
  • Homeowners have to attend the closing to sign the new mortgage documents. They should bring a certified check made out to the closing attorney for any funds they are required to bring. The closing attorney will pay off any claims against the property including taxes, municipal fees and the existing mortgage of homeowner with funds from their new loan.