How to Refinance a First Mortgage & Pay Down a Second

Carrying two mortgages is a financial burden in almost every situation. A borrower in this situation may seek to consolidate both loans into one. In some cases, this isn't possible. In others, the second mortgage may carry more favorable terms than a refinance of the first. One solution to alleviate the strain is to apply for a cash-out refinance of the first mortgage. If approved, you get a lower rate on your first mortgage and you can use the excess cash to pay down the second, cutting the term significantly.

Instructions

1. Contact your lender and ask what would be the maximum loan-to-value (LTV) allowed on a refinance of your first mortgage. LTV measures the balance remaining on your mortgage relative to the current market value of your home.

2. Obtain the value of the property securing your first mortgage. Accomplish this by referring to the appraisal from the first mortgage. If the appraisal is more than a year old, search real estate listings for values of comparable properties in the area to give you an approximation of the current market value. Multiply the value by the LTV. A $250,000 house at 80 percent LTV is $200,000.

3. Subtract the balance of your current mortgage from the LTV. Using the same scenario, if your first mortgage carries a balance of $150,000, you are left with $50,000. This is the property's equity.

4. Complete the lender's loan application and pay any applicable fee. Indicate on the application that the new loan will be a refinance of your first mortgage. Specify that you want to cash-out at the maximum amount for which you qualify.

5. Submit two years of W-2 forms, two years of tax returns, one month of pay stubs and three months of bank statements. The bank uses this information to determine whether you can afford the new payment, the additional funds and the payment on your second mortgage.

6. Accept the commitment letter once approved and schedule a closing date.

7. Obtain a payoff figure from your current first mortgage-holder. If you are refinancing with the same lender, you can skip this as it will generate its own payoff.

8. Sign the documents at closing and receive the check for the cash-out portion. Use these funds to pay down the balance on your second mortgage.

References

• Bankrate: When is Cash-Out Refinancing a Good Option?; Holden Lewis
• Freddie Mac: Cash-Out Refinance Mortgages
• Wells Fargo: Mortgage Cash-Out Refinance vs. Home Equity