How To Refinance a Second Mortgage

A second mortgage can help aspiring homebuyers more easily afford a home or let homeowners borrow their equity to pay for major expenses. But after you’ve closed the sale or spent the cash, you may want or need to reduce the monthly payment or save money with a lower interest rate. If you want to keep your primary loan, refinancing your second mortgage is an option to consider.

What Is a Second Mortgage?

A second mortgage is a loan secured by your home that you take out in addition to your primary mortgage. You will have to apply for it separately, and if you’re approved, it will have its own interest rate and repayment schedule. Your home serves as collateral for the loan, and you will need to make regular payments on the second mortgage in addition to your primary mortgage payment.

Second mortgages can be taken out when you buy a home to reduce the principal on the primary loan and avoid paying for private mortgage insurance. They also can be taken out after you’ve bought it to borrow your home equity. Depending on how much equity you have, a second mortgage could let you borrow thousands of dollars to fund major projects — or, really, anything you wish. Just remember you have to pay it back.

It’s called a second mortgage because if the borrower defaults, the first mortgage has priority for recovering its losses from the sale of the property. The second mortgage lender only receives funds from the sale once the first mortgage is fully repaid.

Because lenders take on a greater risk of not recouping their investment on a second mortgage, they usually charge interest rates that are higher than rates for a primary mortgage but lower than rates for credit cards or other common credit types.

Types of second mortgages

There are three types of second mortgages:

• “Piggyback” loan. A so-called piggyback mortgage is taken out alongside your primary mortgage when you buy your home. It often is used to reduce the amount borrowed on the primary mortgage, which can make approval easier and can help you avoid PMI payments.
• Home equity loan. A home equity loan provides you with a lump sum of money, usually with a fixed interest rate, and you repay it in monthly installments.
• Home equity line of credit. A HELOC uses your equity to establish a line of credit that you can draw on as needed. It works like a credit card account, with your equity setting the limit on how much you can borrow. You borrow and pay interest only on what you spend, and your payments can replenish the credit line as you go.

Can You Refinance a Second Mortgage?

Yes, you can refinance a second mortgage.

“Typically, refinancing a second mortgage is less common than refinancing a primary mortgage,” says Vikram Gupta, head of home equity at PNC Bank in New York City. “However, it does remain an attractive option for some as it may yield benefits, such as lowering the interest rate, consolidating debt, or converting equity into cash.”

Refinancing a second mortgage typically comes with higher interest rates, and the lender’s approval process may be more stringent. You also will need to pay closing costs when you refinance. It usually is easier and quicker to refinance a second mortgage than a primary loan.

“The cost to refinance a second mortgage by default is far less expensive than a first mortgage,” says Jack Kammer, a mortgage loan officer with OriginPoint in La Jolla, California. “Because these loans are far smaller and require less paperwork, they tend to be less expensive.”

There are a few ways to refinance a second mortgage that can help you save money:

• Consolidate your first and second mortgage. If you’d prefer having only one mortgage payment, a cash-out refinance on your primary mortgage would let you use the cash to pay off the second mortgage. That would consolidate both mortgages into a single new loan.
• Refinance only your second mortgage. If you want to keep the terms on your primary mortgage, you can refinance only the second mortgage into a new loan. This can be done to borrow more equity — if you have it — or to improve the terms on the second loan, such as lowering the interest rate or switching from an adjustable-rate to a fixed-rate loan.  

Should You Refinance a Second Mortgage?

You also may want to refinance your second mortgage if it translates into significant savings on the interest rate or somehow offers better terms that are more suitable for your needs.

“You will want to refinance a second mortgage if the current mortgage isn’t fulfilling your needs, if you need a larger loan or line amount, or the payment is variable and you desire fixed for consistent monthly payment amounts,” says Kristi Nowrouzi, a mortgage loan officer with Mpire Financial in Maitland, Florida.

If the costs outweigh the benefits, or if you’re planning to sell your home soon, refinancing may not be worth it. Be sure to carefully evaluate the costs and savings of refinancing before deciding.

5 Steps To Refinancing a Second Mortgage

The process of refinancing a second mortgage is similar to that of getting a second mortgage in the first place.

1. Make sure you meet the requirements

The requirements to refinance a second mortgage are similar to those needed to get a second mortgage. You’ll need to apply with a mortgage lender, which will review your finances to ensure you can afford to repay the loan. That assessment generally includes:

• Proof of income. You’ll want to show your lender you have enough cash coming in to afford the loan. Most borrowers can provide recent pay stubs, W-2 forms, or income tax returns.
• Minimum credit score. Most lenders look for a FICO credit score of at least 680, though some will require a minimum of 720. Generally, a higher credit score improves the chances of approval when you’re seeking a loan and can help you secure a lower interest rate.
• Debt-to-income ratio. Lenders typically require a DTI ratio of no more than 43%. You can use our DTI ratio calculator to figure out your ratio.
• Sufficient equity. You will need equity to borrow before you can get a home equity loan or HELOC. Lenders usually require you to have at minimum 15% to 20% equity.

2. Choose a lender

When shopping for a lender, compare interest rates and fees charged as well as the quality of their service through online reviews. And don’t forget to check with your original lender, which may offer you a deal to keep your business.

3. Apply and submit documents

When it comes to the documents needed for a refinance, be prepared to provide the same information you did when you originally applied for your second mortgage.

4. Schedule a home appraisal

Your lender likely will require a refinance appraisal to get an independent estimate of your home’s value. This will be used to determine your equity, which in turn determines how much you can borrow.

5. Pay closing costs

The process of refinancing a mortgage, whether it’s your primary or a second mortgage, comes with closing costs. You typically will pay about 2% to 5% of the loan amount in closing costs.

Pros and Cons of Refinancing a Second Mortgage

As with most financial decisions, there are pros and cons to consider when refinancing a second mortgage.

FAQ: Refinancing a Second Mortgage

Here are answers to some common questions about refinancing a second mortgage.

The Bottom Line on Refinancing a Second Mortgage

Refinancing a second mortgage can save you money on interest, reduce your monthly payment, and streamline your finances. But there are drawbacks to consider, including the fees involved. If you’re contemplating a second mortgage refinance, be sure to crunch the numbers and review all the loan details to confirm that the benefits outweigh the costs.