Refinancing When You Have a HELOC
Many people are interested in refinancing their homes right. This is not a big surprise, since mortgage interest rates are at historic lows. There are some great deals out there on 30-year fixed loans — and even better deals on 15-year fixed loans.
One of the issues that comes up, however, is that of refinancing when you have a home equity line of credit or a home equity loan. You will have to figure out what to do with the HELOC. It’s not always an easy matter to resolve. When this situation comes up, you have two options:
- Consolidate the first mortgage and the HELOC together, creating one new loan.
- Get a subordination agreement from the HELOC lender so that you can refinance the first mortgage only.
Consolidating the HELOC and the first mortgage
It is possible, when you refinance your home, to pay off both the first and second mortgage at the same time. If you have enough equity in your home, you can pay off both home loans and just have a single mortgage at your new interest rate. Many people choose this option because it is easier to accomplish and requires less paperwork and hassle.
Subordinating your HELOC
Perhaps you have a great interest rate on your HELOC and don’t want it lumped in with your first mortgage. Or maybe you want to refinance your first mortgage only for some other reason. In this case, you need to get a suboridination agreement from your HELOC lender.
When you get loans like this, they are paid off on a first-come, first-served basis. This means that if you ran into financial trouble and went into foreclosure, the first loan gets precedence. So, your home would be sold, and the proceeds would go first to the mortgage lender and then — if anything were left over — to the HELOC lender.
Your refinance changes things around. Your first mortgage is paid off by the new lender when you refinance. This moves your second home mortgage up into first position and your refinance into position behind it. Most mortgage lenders who refinance a first mortgage want to be in first position. This means that the HELOC lender has to agree to remain in second place. Remaining in second place is what is referred to as subordination.
As you might guess, paperwork is involved when it comes to subordination. You will have to get your HELOC lender to agree to remain in second position (usually doable, since that is where your second mortgage lender is anyway). This can take two weeks or more to accomplish, so make sure you plan for this.
