Can You Refinance a 1st Mortgage & Still Keep a Home Equity Loan?
Legally people can refinance their first mortgage and leave the second mortgage or home equity loan in place. However, not all lenders are willing to allow homeowners to keep their second lien when refinancing. Both the lender writing the new first lien and the lender holding the second lien must agree to allow the second lien to stay in place.
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Lien Positions
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When someone buys a home, the mortgage used to buy the house assumes the first lien position on the home. Any subsequent loan assumes a second lien position and some people even have a loan in third lien position. If the house goes into foreclosure because the borrower stops paying on one or all of the loans, the first lien holder gets to make the first claim on proceeds from the sale of the home. The second and third lien holders are only paid after the first lien holder. If a home sale does not raise sufficient funds to cover all of the loans, first lien holders are least likely to incur a loss.
Subordination
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When a homeowner pays off a first mortgage, the second lien automatically assumes the first lien position. The homeowner can request that the second lien holder sign a subordination agreement that legally gives another lien holder the right to move into first lien position. Unsurprisingly given the risks involved, many second lien holders are unwilling to subordinate loans. The homeowner can only refinance the first lien by also paying off the second lien.
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Lien Positions and Rates
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Most mortgages are sold to investors and in instances where homeowners do not have 20 percent equity in a home, lenders must buy mortgage insurance to protect against borrower default. Conventional mortgages are issued on the basis of the loan assuming first lien position. Rates are low because first lien exposes the lender and investors to less risk. Second lien products such as home equity loans are usually retained in the portfolios of lenders. The lenders offset the risk by charging higher rates than those available on first liens.
Exceptions
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There are some instances in which lenders are willing to subordinate a loan. If the lender refinancing the first lien also holds the second, that lender strengthens its own position on the house with the new first lien and loses nothing by also holding the second lien.
Some lenders willingly subordinate liens on properties in high-value markets. If the combined amount of the two liens amounts to a small percentage of the overall home value, the risks of subordination are minimal.
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