Home owners looking to refinance their mortgage may run into some stumbling blocks if they have more than one mortgage on their property. That's because many lenders are now refusing to "resubordinate" second mortgages unless the home owner obtains the new mortgage through them directly.
What is a resubordination? It's an agreement from a lender who holds a second lien to keep that lien in second position once a first lien is refinanced and replaced with a new lien. Why is that necessary? Because by law, a lien in first position cannot be removed and replaced with a new first lien without the permission of the second lienholder. The law is written this way to protect the junior lienholder's equity position. When a first mortgage is refinanced, the lien is removed and a new lien with the new lender is created to take its place (which is often higher than the original first lien since many home owners choose to finance the closing costs into the new mortgage). In order to complete a refinance transaction where two liens exist on a property, the holder of the second lien must agree in writing to remain subordinate to the first lien. A few years ago, these agreements were relatively easy to obtain. But many lenders concerned about their equity position and the increased risk of defaults have changed their rules.
Here is an example of what can happen:
A client of mine recently contacted me to refinance his current mortgage. He currently has an FHA loan and qualified for an FHA streamline refinance since he had made 12 consecutive on-time payments. His mortgage history was good and the value of his property had not fallen. But several months ago, he took out a home improvement loan to build a new pool for his family, which was secured by a second lien. When I contacted them to inquire about obtaining a resubordination agreement, they responded with a copy of their internal policy, which was revised only a few months ago. Basically it stated that he would have to refinance his first mortgage with them in order to obtain a resubordination agreement for the second mortgage. The problem is that their rate was quite a bit higher than the rate I was able to offer at the time. But there was nothing he could do because they controlled the outcome of the transaction by withholding that agreement.
Over the last few months, I've discovered that several lenders have tightened their resubordination policies regarding second liens. This could apply to home improvement loans like the one described above, or even second liens that were originally purchase money loans (combo loans, such as 80/20's and 80/15/5's).
SOME ADVICE FOR HOMEOWNERS:
If you are considering a home equity or home improvement loan and have a first mortgage, look into the possibility of refinancing BEFORE taking out a second mortgage. You may find that you're able to roll your entire first mortgage into a new home equity loan, obtain a lower rate AND still get enough cash back to achieve your goals without having to obtain a new second mortgage. Texas allows a cash-out home equity loan on a primary residence AS LONG AS the total loan-to-value ratio is 80% or less.
Even if your loan-to-value ratio exceeds 80%, you may still qualify for a home improvement loan. However, if you have an above market rate on your first mortgage, consider refinancing it before taking out the second loan. Once you take out an additional loan that creates a second lien on your home, you may find yourself at that lender's mercy if you try to refinance at a later date. This is definitely something to consider before taking out a second mortgage.