Is it Time to Refinance Your Second Mortgage?

Second loans come in a variety of packages and are called by a lot of different names. Most of them, however, carry higher interest rates than those associated with typical first mortgages. One reason to refinance is to lock in a lower fixed-rate that will be paid off over a long period of time without the worry of constantly adjusting rates. And if you have enough equity in your home, you might be able to do that by refinancing your first mortgage for an amount higher than your current principal balance, and using the extra funds to pay off your second mortgage.

Let's say, for instance, that you took out a second loan in order to help make your original down payment, or to decrease the loan-to-value ratio enough to avoid pesky PMI payments. You may have a lingering second mortgage at a rather high rate of interest. It was worth it in the beginning, because it helped you buy your house without any glitches. But if your equity has risen sufficiently, it may be time to refinance your first mortgage for a large enough amount to cover both mortgages, and still get an attractive fixed rate. For example, if your house is worth $300,000 and you owe $200,000 on the first mortgage and $15,000 on the second one, you can refinance your first mortgage for $215,000 and cover both notes with one low rate. Borrow $220,000 or so, to cover your closing costs, and you won't have to spend any money out of pocket to pay for refinancing.

If your first mortgage was taken out a long time ago, when rates were higher than they are today, you should seriously consider this kind of refinance strategy. If your first mortgage is an adjustable rate loan, which will soon force you to pay higher interest and monthly payments, converting to a fixed rate loan to consolidate your first and second mortgages is a basic no-brainer.