You have a first and second mortgage on your house, and now you want to refinance the home. Is refinancing possible under the circumstances? In some cases it’s possible, but in other cases not. Let’s talk about each scenario.
Many people who cannot afford a big down payment end up using a first and second mortgage to pay for the home. This is often referred to as a piggyback mortgage, since the second mortgage is piggybacked onto the first one. When a home buyer cannot afford to put 20% down on a home, he or she will have to pay private mortgage insurance, or PMI. The first and second mortgage strategy is often used to avoid paying PMI.
Here’s an example of how it might work:
The home buyer cannot afford a 20% down payment, which is needed to avoid paying PMI. The lender is unwilling to offer a loan for more than 80% of the home value. So additional financing is needed to push things through. This is where the second mortgage comes into the picture. The home buyer might put, say, 5% down on the house. Then they’ll get an 80% loan from one lender and a second loan for the remaining 15%. They now have a first and second mortgage on their home.
How to Refinance First and Second Mortgages
Now to the question at hand. Can you refinance your home when you have a first and second mortgage, and if so how? The answer — as usual — is that it depends. Typically, it will depend on the following things:
- How much equity you have in the home (most important).
- How much your second mortgage is, relative to the first.
- How long it has been since you secured your second mortgage.
- How high your credit score is, at the time you apply.
These are the most common criteria you’ll encounter when you try to refinance a first and second mortgage loan. But you need to understand that every lender has its own requirements for these items. You also need to realize that all of the “rules” of refinancing have changed, in the wake of our economic recession.
Let me give you an example of how things vary from lender to lender. On the Bank of American website, I found an FAQ similar to this one. The question was: Can I combine my first and second mortgage through a refinance loan? Here’s a summary of their answer:
“If it has been at least 12 months since you secured the second mortgage … and you still have 10% equity in the home, you may be able to consolidate it with the first mortgage.”
So you can see the criteria I mentioned earlier — the length of time you’ve held the second mortgage, and the amount of equity you currently have in the home. Every lender will put their own spin on this, but these are the key criteria involved when you refinance to combine a first and second mortgage loan. In fact, the 12-month requirement mentioned by BOA above is pretty standard. Most lenders will require you to wait at least 12 months after securing the second mortgage, before you can refinance it.
Equity is also important, because the new loan cannot exceed the current value of your home. Note the word “current” in that last sentence. You can forget what you paid for the home ten years ago, five years ago, or even last year. That number is no longer relevant. Why? Because property values have dropped in most cities across the country, and in many places they have dropped like a rock. So your home’s value in the current market may be less than what you paid for it. So equity is a big factor when refinancing a first and second mortgage together — and for many people, it’s an obstacle they just can’t get past.
Let’s see what some other mortgage companies have to say on this topic. Here’s a quote from the BD Nationwide Mortgage website:
Combo refinancing makes good sense if you have at least 20% equity … But, if you combine first and second mortgages together with less than 20% equity, your new loan will generally end up carrying costly PMI.
In this kind of scenario, you could end up paying more in the long run (by adding PMI coverage onto your mortgage payments). Remember, anytime the loan-to-value ratio is over 80%, you’ll probably have to pay for mortgage insurance. This is a big consideration when people try to refinance first and second mortgage loans together. As I said earlier, equity is the number-one obstacle homeowners face when refinancing in the current economy.
Where to Go From Here
If you think you might meet the basic guidelines I outlined earlier, and you want to see if you can refinance to combine your first and second mortgages, you should start with your current lender. They might offer you the best terms, since your loan is already with them.
I hope this lesson helps you understand the relationship between home equity, refinancing, and piggyback mortgage scenarios. If you would like to learn more about this topic, I recommend that you talk to a mortgage lender. They are the only ones who can tell you if you qualify. We add new lessons to this blog on a near-daily basis, so be sure to bookmark this website for future reference.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author