How to Refinance a Second Mortgage

Taking out a second mortgage, like a home equity loan or a home equity line of credit (HELOC), can be a great way to use your home’s value to gain more financial flexibility or fund major expenses. 

After you’ve taken out your second mortgage, refinancing may give you access to lower interest rates on your loan. It could also allow you to obtain more favorable terms, convert it to a different term length, or consolidate debt. 

Let’s examine what goes into a second mortgage refinance and whether it’s right for you. 

Steps in refinancing a second mortgage

Refinancing a second mortgage can be simple, but there are several different steps you often must complete before you can refinance your home equity loan or HELOC: 

• Making sure you qualify: Lenders typically look for favorable credit scores, a certain minimum of home equity, and a threshold for your debt-to-income (DTI) ratio before approving your refinancing. 
• Gather your documents and apply: You will usually need to prove your eligibility with bank statements and proof of income so your lender can assess your application. 
• Receive the funds or line of credit: Once approved, you should receive a lump sum for your home equity loan or a revolving line of credit for a HELOC, minus the fees that the lender is charging for your new agreement. 

Note: you might want to avoid applying for other loans while your second mortgage refinance is under review. This might change your credit and affect your eligibility in the process. 

Home equity loan vs. HELOC: different steps for refinancing

A home equity loan and a HELOC each have unique characteristics that can change how you refinance.

With a home equity loan, you get access to all your funds at once and usually pay your funds back over 5 to 30 years. With a HELOC, you typically have 10 years to withdraw money up to your approved limit, known as the draw period. After that, you could have 20 years to repay what you have borrowed during the “repayment period.” 

You usually need similar qualifications to refinance a HELOC or a home equity loan. How much you can borrow for each could depend on the equity you hold in your home compared to what you owe on your primary mortgage. HELOCs typically have variable interest rates, meaning that the rates could change throughout your loan. On the other hand, home equity loans typically have a fixed interest rate. 

Refinancing with a HELOC or home equity loan

Lenders will often suggest refinancing one type of second mortgage with the other. For example, refinancing a HELOC may lead you to open a home equity loan, allowing you to pay off what you owe on the HELOC all at once in a lump sum fashion.   

On the other hand, you might refinance your home equity loan with a HELOC if you want to access your home equity. Both options may come with similar closing costs, and you should ensure the refinance makes sense for you in the long term. 

Cash out refinancing

The other way to refinance a HELOC or a home equity loan would be to replace your current mortgage and opt for a cash-out refinance mortgage. This allows you to consolidate your primary mortgage with your second mortgage, simplifying your monthly payments.  

To do this, you typically need to maintain 20% equity in your property after the cash-out refinance, and some mortgage lenders may charge higher rates for this new loan because they are taking on more debt. 

Obtaining a second mortgage: eligibility and considerations

To be eligible for refinancing a second mortgage, you generally must meet certain criteria like you would for primary mortgage loans. These factors include: 

• Favorable credit score 
• Minimum debt-to-income ratio  
• Sufficient equity in your home 

As with most loans, your income and creditworthiness matter to lenders. Minimizing your debt, increasing your income, paying off your primary mortgage, and raising your credit score all can improve your eligibility and access to more favorable terms.  

However, lenders may consider some additional factors for refinances that are not common to other loans, like how long you’ve owned your home and how much equity you have in it. These mortgage-specific factors are important to keep in mind and might influence your decision to refinance your second mortgage.

Refinancing a second mortgage: advantages and disadvantages

The value of refinancing your second mortgage depends on your financial needs and the terms you could obtain. If you feel like you have improved your financial profile, increased the value of your home, or interest rates have decreased to the point where you can access better rates by refinancing your HELOC or home equity loan, then refinancing your second mortgage may be worth considering. 

This year, Fannie Mae and the Mortgage Bankers Association have predicted that interest rates will close the year at 6-7% Annual Percentage Rate (APR). Perhaps that shift in rates allows you to lower your own rate by at least 1% APR, and in that case, this might be the right time to refinance your second mortgage.