Refinance Options for Second Mortgages

The first step in deciding how to refinance two mortgages is to know exactly what your options are.

A sleight-of-hand magician writes down the best strategy for restructuring your mortgage debt on a slip of paper. He places it on a table and puts a plastic cup over it, face-down. He then produces three more identical cups and proceeds to shuffle all four on the table, as you try desperately to keep your eyes on the one that contains your mortgage advice.

The four choices

In life, circumstances change. And when they do, you have to roll with the punches. Refinancing mortgage debt can be one way to adjust your situation to fit the circumstances around you. When you're carrying a first and second mortgage, you have four basic refinance options:

1. Convert your two mortgages into one. You might like the convenience of replacing your two mortgages with one mortgage and one payment. Whether it makes financial sense to do this, however, depends on the rates that you're currently paying on each mortgage. A mortgage calculator can quickly tell you what your blended rate is. When you consider the closing costs that you'll incur, the ideal refinance rate would be about two percentage points lower than your current blended rate. Of course, you might have reasons for refinancing anyway, even if market rates aren't that low. You might, for example, want to lengthen your loan's term, or convert equity into cash.

2. Refinance your home equity loan or home equity line of credit (HELOC). Refinancing just the second mortgage is the simplest option of the four. If you have an adjustable-rate equity loan or line of credit, you can eliminate the risk of rising payments by refinancing to a fixed-rate loan. If you have a good history with your existing lender, ask if you qualify for a fast-track loan. Then shop around for quotes from other lenders, too. It's the best way to ensure that you're getting your best possible deal.

3. Refinance your first mortgage. When you have a good rate on your second mortgage, you might consider refinancing just the first one. This process can be a tricky one, however. Paying off your first mortgage automatically causes the second mortgage to jump into the first lien position. You'll have to ask your second mortgage lender to allow the refinance lender to have that first lien spot.

4. Refinance the first and second mortgages into two new mortgages. Finally, you can always refinance both your first and second mortgages. This might be an option if you like the dual mortgage structure and your second mortgage lender won't allow you to refinance the first mortgage.

As it turns out, each of the magician's four cups contains a slip of paper with a bit of mortgage advice. It's up to you to use your research skills and a mortgage calculator to determine which option saves you money and brings you closer to your financial goals.