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What happens when you refinance and you have a second mortgage?
Homeowners often miss an important point about having a second
mortgage, home equity loan, or home equity line of credit.
If you refinance your existing first mortgage, the lender
that holds the second mortgage lien must sign a subordination
agreement, or the loan must be paid off with your new mortgage.
A subordination agreement basically says that the lender
agrees to stay in second lien position on the property title
while the new lender assumes the first position. Your refinance
loan cannot close until this signed legal document has been
received by your lender. It's important that your lender knows
upfront that you have a second mortgage, so they can expedite
the process. You don't want this condition to delay the funding,
especially once your mortgage rate has been locked.
Subordinating a second mortgage can have other issues: The
terms of the new first mortgage must be within the second
lender's guidelines regarding the maximum combined loan to
value, or if there can be negative amortization. Also, in
qualifying for your new loan, the second mortgage payment has to
be included in the debt ratio calculation, unless the loan is
paid off.
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