Refinancing when you have two mortgages

If the borrower in a refinance has at least two mortgages—both a first mortgage and a second mortgage—on the subject property, that borrower will have three refinancing options, which have different challenges:

  • Consolidation. The borrower may choose to pay off both loans with a new refinance loan. This refinance loan in effect consolidates the primary and junior mortgage loans. If the second mortgage is at least one years old, then this would be considered a rate and term (non-cash-out) refinance and have higher loan-to-value (LTV) ratios.
  • Refinance the second mortgage only. The borrower may choose to refinance only the junior mortgage and leave the primary mortgage as it is. The new loan will have to be a second mortgage loan.
  • Refinance the first mortgage only. The borrower may elect to refinance only the primary mortgage and leave the junior mortgage as it is. However, this requires subordination of the existing second mortgage. [Remember that liens are recorded chronologically. The new first mortgage loan wants to have first lien. The lender on the second mortgage loan must agree in writing that the new first mortgage will assume priority lien over that existing second mortgage. The existing second mortgage "subordinates" itself to the new first mortgage.]

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