Second mortgage complicates refinancing

Having a home equity loan or home equity line of credit when you're trying to refinance your mortgage adds a layer of complication to the approval process.

That's because the second mortgage holder, which is legally entitled to move into first place when the first mortgage is refinanced, must agree to give up that spot to the refinance lender. If you can't strike such a deal -- called a resubordination -- you have three options:

-- Pay off the second mortgage.

-- Consolidate both loans with the second mortgage lender.

-- Forget about the refinance altogether.

Most refinancers prefer to go the resubordination route, though it takes time and often involves fees. Resubordination rules differ for loans under the Home Affordable Refinance Program, or HARP.

Before a lender can refinance your primary mortgage, it must submit a subordination package -- all of the documents supporting the request -- to the institution holding your home equity loan. The second mortgage lender typically charges a fee of $75 to $100 to review the package, says Anne Benjamin, chief operating officer at Redwood Credit Union in Santa Rosa, Calif. Unless there are questions about the home's value, Redwood seldom denies resubordination requests to second lien holders, Benjamin says. When there are such issues, the credit union is unlikely to send the prospective refinancer's request to begin with.

"If the loan-to-value doesn't work upfront, we are not going to recommend that they go down the road with this," Benjamin says.

HARP allows homeowners to refinance their mortgages, even when they owe more than their houses are worth. The program was revised recently to increase the number of borrowers who can participate. Among the changes is an item that seeks to remove the resubordination hurdle for many applicants with second mortgages.

As before, HARP is available only to homeowners whose mortgages are held or guaranteed by Fannie Mae or Freddie Mac.

"The largest lenders have agreed to resubordinate their second liens," says Stefanie Johnson, a spokeswoman in the congressional affairs office of the Federal Housing Finance Agency, which regulates Fannie and Freddie.

But Natalie Brown, spokeswoman for the Wells Fargo Home Equity Group, says her bank is still reviewing the guidelines to determine if it will automatically agree to take second place behind the new HARP loans. Wells Fargo approves most resubordination packages from first-edition HARP loan applicants, Brown says.

She says situations that might lead Wells Fargo to deny subordination requests include changes in property ownership (for example, collateral vesting changes) "or when the home equity account holder is not on the title of the newly refinanced mortgage."

Wells Fargo typically processes HARP subordination requests within two days and charges from $50 to $150, she says.

If your home equity lender refuses resubordination but you still want to refinance, one solution would be to pay off the second loan. Benjamin says Redwood Credit Union will consult with members about the feasibility of doing so.

The refinancing lender could offer to add the home equity debt to the refinanced mortgage, but Brown says you should consider lending requirements and closing costs first.

"You're essentially applying for a new loan, and there is a chance that current credit guidelines are tighter today" than for the original loan, she warns. She recommends comparing the monthly payments and total interest over the life of the new single loan versus current payments.

Valerie Cardenas, senior vice president of mortgage lending at International Bank of Commerce in McAllen, Texas, says borrowers often benefit from consolidating because the rates on home equity loans are typically higher than current primary mortgage rates. But if your second loan has a fairly low balance, it might not be worth the cost of combining the loans.

"You also have to consider that there are closing fees involved," Cardenas says. "Just continue to pay as agreed until you eliminate that balance."