How to refinance a second mortgage: HEL, HELOC, or piggyback

May 10, 2022 - 7 min read

Can you refinance a second mortgage?

It’s possible to refinance a second mortgage. However, these loans are considered higher-risk because they’re a second lien after your first mortgage. And that means they carry higher interest rates.

Because of this, many homeowners looking to refinance a second mortgage end up rolling their home equity loan or HELOC into their first mortgage via a cash-out refinance. This could potentially lower the interest rate and eliminate a second monthly payment.

Are you looking to refinance a second mortgage? Learn about refi options and interest rates to see what will work best in your situation.

Check your refinance eligibility. Start here

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Understanding second mortgages

A second mortgage is an additional loan secured by your home’s value which doesn’t affect your first (primary) mortgage loan. Borrowers can use a second mortgage to tap their home equity without changing the rate or term on their existing mortgage.

“A second mortgage is subordinate financing with a secondary lien position to a primary mortgage loan,” says J.D. Dinnocenzo, vice president of Family First Funding in Delray Beach, Florida. “Second lien position” means the second mortgage lender would get paid after the first mortgage lender in the event of a foreclosure.

There are two common types of second mortgage loans:

  1. A home equity loan
  2. A home equity line of credit (HELOC)

You may also have a second mortgage if you used a piggyback loan to supplement your down payment and avoid private mortgage insurance (PMI) when you bought your home.

Many borrowers who take out a second mortgage loan choose to keep it and pay it off in total over their repayment period. Others opt to refinance out of their second mortgage or into a new one with a lower rate or higher balance.

If you want to refinance your second mortgage — or refinance out of it — here’s what you should know.

Reasons for refinancing a second mortgage

Homeowners typically refinance second mortgages for one of four reasons, according to the experts:

  1. To get a lower second mortgage rate and monthly payment
  2. To borrow more money from their home equity
  3. To switch from an adjustable-rate loan to a fixed-rate loan and avoid rate hikes
  4. To roll their second mortgage into their first mortgage

“Let’s say you have a second mortgage that has a fixed rate with a payment of $500 a month. If you can refinance that second mortgage and receive a lower payment of $300 by locking in a lower interest rate, it makes sense to refinance,” notes Jason Gelios, a Realtor in Southeast Michigan.

Realtor Bill Gassett, the founder of Maximum Real Estate Exposure, says there are other times when refinancing a second mortgage makes good sense.

“Say the value of your property and equity has increased. You can choose to refinance your second mortgage to take out more money if needed. Remember that the amount of money you can borrow is tied to how much equity you have in your home,” explains Gassett. “Or, if you currently have a variable-rate second mortgage loan, it might be worthwhile to refinance into a fixed-rate second mortgage loan, especially if interest rates are projected to rise.”

Keep in mind that a second mortgage is considered a costlier loan because it typically has a higher interest rate than a primary mortgage loan.

“That’s why many homeowners actually refinance their first and second mortgages into one new loan. It usually makes sense and can lower their overall monthly housing payment,” Dinnocenzo continues.

Check your refinance eligibility. Start here

Who should refinance a second mortgage?

It may be worth refinancing your second mortgage if you can either save money on the existing loan or borrow additional funds from your home equity.

“These funds could be used for any purpose you see fit, such as making repairs around the house or helping your child with college expenses,” Gelios says.

If you have a first and second mortgage and your combined balance equals less than 80% of your home’s value, it can also be wise to roll both mortgages into one loan to lower your total principal and interest payments.

“However, if your loan balances are above 80%, combining a first and second mortgage may not always make sense. That’s because you’ll need to pay private mortgage insurance in this scenario, which protects the lender in the event of a default by you, the borrower,” adds Dinnocenzo.

In addition, interest rates have risen from their historic lows in 2020 and 2021. So if you already have an ultra-low rate from the past couple of years, it might not make sense to refinance at today’s higher rates. But that will depend on your specific situation.

Options for refinancing a second mortgage

The most common way to refinance a second mortgage is to combine your first and second mortgage loans into one new primary home loan. This involves using a cash-out refinance on your primary mortgage to pay off your second mortgage, thus resulting in a single loan and a single monthly payment.

“Considering that second mortgages come with higher interest rates, it almost always makes sense to pay it off by refinancing the first mortgage. When doing a cash-out refinance to pay off a second mortgage, you transfer the second mortgage balance over to the first mortgage and benefit from a more attractive interest rate,” Gelios explains.

“Just remember that keeping the total loan amount at or below 80% of the home’s value is important if you want to avoid paying private mortgage insurance on your refinanced loan,” suggests Dinnocenzo.

Or, as mentioned, you can refinance only your second mortgage loan into a new second mortgage loan, preferably one that offers a lower interest rate, lower monthly payments, shorter loan term, or a higher loan amount that can fund your financial goals.

Steps to refinance a second mortgage

As with refinancing a primary mortgage, refinancing a second mortgage involves several steps. You’ll need to complete a loan application, provide proof of income and assets, and have your credit and income carefully checked. “A mortgage underwriter will review documentation that you’ve provided to your loan officer,” Dinnocenzo says.

You likely also need to pay for a new home appraisal. Once you are approved, your lender will schedule a loan closing.

Be aware that refinancing a second mortgage may be more challenging than refinancing a first mortgage.

“That’s because second loans are considered higher-risk loans. As such, you may need to have sufficient equity in your home and excellent credit to qualify for a lower interest rate,” says Max Benz, founder and CEO of BankingGeek. “Additionally, closing costs on a second mortgage refinance can be higher, so be sure to factor that into your decision.”

Check your refinance eligibility. Start here

Refinance second mortgage: FAQ

Can you refinance your primary mortgage while leaving a second mortgage untouched?

Yes. However, your second mortgage lender must agree to remain in the second lien position. This is referred to as ‘subordination,’ according to J.D. Dinnocenzo with Family First Funding. And it can make refinancing with a second mortgage more difficult than refinancing without one.

Can you refinance a piggyback loan?

Yes. A piggyback loan is just another name for a second mortgage, and you are allowed to refinance any second mortgage. Some homeowners may refinance their piggyback loan by rolling it into their primary mortgage via a cash-out refinance.

Can you combine two mortgages into one?

Yes. You can combine your first and second mortgage loans into one new primary mortgage loan, so long as your home has sufficient equity to cover both mortgages. Typically, you’ll want your combined loan-to-value ratio (CLTV) to be under 80 percent for this strategy to work.

How do you get rid of a second mortgage?

There are two ways to eliminate a second mortgage: Either pay off the balance of the second mortgage or refinance your first and second mortgage loans into one new primary loan.

Do I have to pay off my second mortgage when I sell my house?

Yes. When you sell your home with a first and second mortgage attached, you need to have both mortgages paid off at closing. It’s not possible to sell a home with any mortgage and lien existing on the property.

Your next steps

Many homeowners use a cash-out refinance to combine their first mortgage and second mortgage into a single home loan. Others may choose to refinance only their second mortgage for a lower interest rate or additional cash-back.

If you’re looking to refinance a second mortgage, talk to a mortgage lender about loan options and current interest rates. You can get started right here.

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Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.