If you took out a second mortgage several years ago, and your financial situation has changed, there are several reasons you may want to refinance your second mortgage. You could get a more favorable interest rate, eliminate the private mortgage insurance (or PMI) that may have been required with the mortgage, or combine your first and second mortgages so you don’t have to make multiple monthly payments.
You might be able to refinance through your second mortgage holder, or find a more advantageous program through a new lender. After you find a second mortgage refinance program appropriate to your needs, check that your credit score is up to date and that you do not have any past due bills, ensuring that you will be approved. You will want to fill out applications with multiple lenders, so that you have more than one loan offer to choose from.
One option for refinancing may be to take out a home equity line of credit, or HELOC, and use this to pay off your first or second mortgage. The interest payments on a HELOC may be lower than the interest on a home equity loan (HEL).
If you have a balloon payment ― in which the principal is due in full at the end of the loan repayment period ― coming due, another option is to refinance your second mortgage with an extended prepayment schedule, giving you more time to gradually pay off the debt. If, on the other hand, you are doing well financially, you could refinance your second mortgage with a shorter repayment schedule – say, 10 years as opposed to 30 – so that you can save on interest payments.
Keep in mind that when you refinance a second mortgage, you are paying off your current loan in advance, in exchange for a more favorable loan. Your fixed-term second mortgage probably has a provision that imposes penalties if you pay off the debt early, so weigh these penalties against your potential savings from refinancing.
Also be sure that you have enough cash on hand to pay the closing costs and transaction fees associated with refinancing your second mortgage. You may want to move some funds out of investments and into a savings account to cover this important loan adjustment.
If you are planning to sell your home and move out within a few years, refinancing your second mortgage may not be worth the hassle and additional costs. It will probably take several years of continuing to gain equity in your home to make these costs worthwhile.