I really try to lean towards writing about purchases here at Rain City Guide…don’t know why that is…it just is.  But the fact is, there are a lot of refinances going on right now and many may have second mortgages that are not going to be paid off as part of the refinance.    A recent comment on my post about unhonored rate locks prompted this post…it’s probably not his mortgage professionals fault his refi is taking this long…it’s his second lien holder.

If a second mortgage is not paid off, the new first mortgage will require it to be subordinated.  This means that a subordination agreement must be recorded to make it public record that the second mortgage (often times a HELOC) is in second lien position and not first lien–this all boils down to who gets what rights in the event of a foreclosure.

Just because a lender request a second mortgage/HELOC lien lender to subordinate, doesn’t mean they have too…they get to mull it over and they can refuse to subordinate…which means that with the refinance, if the first mortgage (the proposed refinance) or the home owner cannot pay off the existing second mortgage, it’s probably a dead deal.

Some home owners want to keep their second mortgage or HELOC (home equity line of credit) because:

• they can’t get a new one based on today’s guidelines and lack of availability.
• they have a great rate that can’t be replaced.
• their refinance will be classified as a cash out refinance if the second mortgage/HELOC was not obtained when they purchased their home.  (It doesn’t matter if the home owner refianced the orignal purchase money second mortgage and NEVER took cash out of the home–it’s treated as “cash out” with a whole new set of rules and pricing).
• including the second mortgage pushes the home owner over certain loan limts (conforming, FHA, etc.).

Most second lien holders will not consider subordinating until the have a copy of the appraisal for the refinance and full underwriting approval from the first mortgage….then you wait for them to process it.   Some banks are taking more than a month AFTER receiving the appraisal and loan approval before they will CONSIDER IF they will subordinate…and there’s no guarantee they’ll do so.    I’ve seen some banks charge $250.00 to process a subordination REQUEST (no guarantee).    A borrower may be out the appraisal cost and the subordination fee with no refinance worse case scenario.

Have an honest conversation with your mortgage professional and ask questions…

• Should or can you pay off the second mortgage with your refinance?
• How long should the subordination take?  (some banks or credit unions take longer than others)
• What happens if you lock and the subordination takes longer than expected?

If you’re a home owner with a second mortgage/HELOC that you want to subordinate, be prepared for a much longer closing which means, if you’re locking at application, a slightly higher rate or more in points–the longer the lock period, the more expensive it is.   Or you can risk floating your rate.  The choice is yours and there is no guarantee that the second mortgage/HELOC lien holder will subordinate…any risk (borrower or lack of equity remaining in the home) may cause the bank to give the subordination a thumbs down.  It’s nothing new.