Not only can you refinance with a home equity loan, you might have other options.
When you have a home equity loan, you might think that your hands are tied. Friends and family members may take advantage of refinances with lower interest rates, but there you are with not one but two mortgages on your property. Are you really as stuck as all that? Maybe, but probably not.
The important thing is that it really is possible to refi, even if you have a home equity loan. It's not as straightforward as with only one mortgage. But in the right circumstances, it can be done. Here's what you need to know about it.
Home equity loans should stay hassle free when you refi.
A Home Equity Loan is Really a Second Mortgage
Home equity loans are just another name for something that's been around for a long time. Second mortgages are secondary to first mortgages, and they're usually smaller and often for shorter terms. Lending Tree says they're usually considered relatively inexpensive ways to borrow money, but that doesn't mean they're cheap.
The trick here is priority. A home equity loan is always second fiddle to a first mortgage. That means if you ever default, the first mortgage holder gets first dibs on the property. And it should stay the same when you refinance, since your new first mortgage will replace the old one while the home equity loan stays the same.
This isn't automatic, though. Before you refi, you'll have to ask the second mortgage lender to sign a subordination agreement, which means it agrees that once a second mortgage, always a second mortgage. In other words, it won't slide into first mortgage status when your old first mortgage is paid off.
But What if a Lender Doesn't Cooperate?
Usually, home equity loan lenders are accustomed to staying in second place behind the first mortgage, even when one first mortgage is replaced with another. But sometimes a lender gets fussy about it. In those cases, the home equity loan lender might want you to pay off the second mortgage when you refi your first mortgage.
Lending Tree says that's not always a problem, either. Your new lender already knows about the second mortgage. That debt is factored into your total Loan to Value and total indebtedness, your ability to pay, and all of the other measures that they have used to determine your creditworthiness.
Chances are, if you want to pay off the second mortgage when you refinance your first, you can. It might be a smart idea, too, since home equity loans usually have at least a slightly less favorable interest rate than first mortgages.
Consolidation might be a great bargain.
There's Something Else to Think About
Before you decide to pay off everything and move forward with one new first mortgage and no second, consider all of the terms of the second. It's probably got a higher rate, but what about the length of the loan? It's probably a lot shorter.
If you pay off your home equity loan, effectively rolling it into your new first mortgage, you've tacked on years - maybe a lot of years - to what was a shorter term. Now is the time to do a little math.
Will you pay more in the long run if you keep the original home equity loan at a higher rate but for a shorter term? Or will you pay more if you roll it into your new mortgage at a lower rate but for more years? It all depends on the terms that your new first mortgage offers.
The important thing here is knowing that you have options. Just because you have a home equity loan or second mortgage doesn't mean that you're stuck in the same old situation until that second is paid off. You can keep it as is, or you can pay it off and move the balance into your new mortgage until all new terms.
Sometimes it's tricky, deciding when is the right time to refinance your home. Eppraisal can help remove a lot of the guesswork. Maybe the time is now. But then again, maybe it's better to wait. Get more information from our home refinance articles, like this one, When to Refinance Your Mortgage.