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Refinancing a Second Mortgage

by Don Rafner

That second mortgage loan may have helped pay for your child's college education. Or maybe it helped you pay down high-interest-rate credit-card debt. You might even have used it to finance a much-anticipated cruise. But now the interest rate on that second mortgage loan seems high, and you'd like to refinance it to a lower rate. Doing so could save you hundreds of dollars a month. But it's not always easy.

Types

There are two main types of second mortgage loans: a home equity loan and a home equity line of credit. A line of credit, known as a HELOC, acts like a credit card. You are given a balance that depends on the equity in your home. If you have $20,000 worth of equity, your lender might give you a HELOC with a balance of $15,000. This means that you can borrow up to $15,000. You only pay back what you've borrowed. If you've only borrowed $8,000, you only have to pay that amount back, much like you would with a credit-card balance. A home equity loan is more like a traditional mortgage loan. You pay it back over time, with regular payments due the same time each month.

Refinancing

Refinancing a second mortgage loan can be challenging. Lenders today will typically approve a refinance request only if homeowners have at least 20 percent equity in their homes. Homeowners who have two mortgage loans might struggle to reach this level, especially if their homes have lost value since they purchased them. Lenders count both loans against a home's equity. If your home is worth $200,000 and you have a first mortgage loan with a balance of $180,000 and a second mortgage loan for $20,000, your total amount owed is $200,000. You have no equity and will struggle to refinance either your first or your second mortgage loan.

Debt-to-Income Ratio

Two mortgage loans can also make it more difficult for homeowners to reach the debt-to-income ratios that most lenders require for a refinance. Most lenders want your total monthly debts -- a figure that includes your estimated new monthly mortgage payments -- to equal no more than 36 percent of your gross monthly income. If you have two monthly mortgage payments, that adds to your total monthly debts. It can be a struggle for homeowners without a large salary to meet that 36 percent debt-to-income threshold.

Process

If you do have enough equity in your home and your debt-to-income ratio is solid, you can begin shopping for a mortgage lender to refinance your second mortgage loan. You can work with any lender licensed to do business in your state. You don't have to work with the lender currently servicing your second mortgage loan, though working with that lender might reduce the amount of paperwork you need to submit. Lenders will run your credit -- today's lenders consider credit scores of 740 or higher on the FICO scale to be strong scores -- and verify your income and debts. To help lenders do this, you'll have to provide them with copies of such financial documents as your last two years of income-tax return statements, last two paycheck stubs and last two months' worth of bank account statements.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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