How to Refinance a Second Mortgage

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Monthly mortgage payments can take a big chunk out of the normal consumer’s monthly income.  This can cause a great deal of stress for homeowners, especially if it means that payment for some other necessity must be delayed.  In situations such as these, a second mortgage refinance may help ease a homeowner’s burden.

The very term “second mortgage refinance” may strike fear in the hearts of many homeowners.  If a first mortgage is hard for them to manage, wouldn’t a second mortgage be twice as hard?  It is important that homeowners understand that a second mortgage refinance does not follow the same terms as the first mortgage.  In fact, it could even alleviate some of the emotional and financial stress caused by the initial mortgage.

The initial mortgage occurs when a lender loans money to a person to buy a home.  In return, the homeowner signs a binding legal document (the mortgage) wherein the property reverts to the lender should the homeowner neglect to repay their loan.  A second mortgage is similar except the lender on this loan would be in the second position.  A second mortgage refinance is just that, secondary.  Therefore, the lender responsible for the second mortgage refinance takes a subordinate role to the initial mortgage lender.

Because of their subordinate role, second mortgage refinancing is a riskier loan.  Many lenders involved in a second mortgage refinance will charge a higher Annual Percentage Rate (APR) than a buyer might see for the first mortgage.  Therefore, it is imperative that buyers treat a second mortgage refinance with the same care and attention they would give to their first mortgage.

There are two types of second mortgage refinance loans.  There are equity seconds and over-equity seconds.  The two operate in similar manners. The differences are mainly seen when the homeowner considers the amount of the loan they believe they need.

With equity seconds, the lender will consider the equity the homeowner has when estimating the loan amount and corresponding APR.  The equity can be found by subtracting the amount the homeowner still owes on the first mortgage from the fair market value of the property.  This type of loan is beneficial to many borrowers due to the average interest rate.  A second mortgage refinance loan generally has a low interest rate because it is based on a property that the borrower already owns. 

A home mortgage refinance loan can also come in the form of an over-equity second.  This type of loan will be for an amount that exceeds the value of the home.  These loans tend to be for a great deal of money and are normally used when a borrower needs to secure funds that they could not get from another type of loan.  Thus, many who have been rejected by their bank or credit card institution might apply for this type of loan.

The type of second mortgage refinancing required depends on the homeowner’s needs.  Those who need a small amount of money to pay for a vehicle or some other personal purchase may use an equity mortgage refinance.  Others look into this type of loan to secure funds for home improvement.  Using funds in this way can greatly benefit homeowners, as improvements to the home tend to increase property values. Those requiring larger amounts of money will, of course, prefer the idea of the over-equity loan.  Many homeowners have children who will need money for their college educations.  An over-equity loan would be great for this particular use since university tuition can cost between $10,000 and $25,000 per year.

The qualifications for a second mortgage refinance are basically the same as they are for any loan.  Good credit is the criteria considered most important by lenders.  However, bad credit doesn’t necessarily mean the loan request will be turned down.  If the second mortgage refinance is to help the homeowner pay off bills, it may very well be approved, since consolidating one’s debt will make it easier for the borrower to pay their bills on time, every time.

As always, it is important to shop around for the best rate on a second mortgage refinance before committing to one.  Interest rates can mean a difference of hundreds of dollars per year to homeowners.  Second mortgage refinancing can be very helpful if it is understood and utilized correctly. 

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