With interest rates low, many homeowners are considering refinancing their mortgages these days. But even if you have excellent credit and plenty of equity, there might be one last obstacle to overcome: your home equity loan.
There's a hierarchy in the lending world that describes which lenders get paid first in the event of a default. The oldest loan, which is the primary mortgage for most homeowners, is first in line, followed by any more recent loans, such as a home equity loan or line of credit. When it comes time to refinance your primary mortgage, most lenders will require it be placed back in the first position, even though it’s no longer the oldest loan. This involves “resubordinating” your home equity loan -- or shuffling it from first in line to second in line.
To do this, homeowners must submit a resubordination request to the lender on their home equity loan. It can take over a month to process a resubordination request, especially as the recent spike in refinance activity pushing lenders to capacity. In some cases there will be a fee. In other cases you’ll have to completely renegotiate the terms of your home equity loan or line of credit. Even so, there's no guarantee that your lender will agree to resubordinate the loan.
If they don’t agree, you only have a couple of options to move forward on your refinance. Option one is to pay off the home equity loan or line of credit and close the account.
Alternatively, you can consolidate your home equity loan into your refinanced mortgage, leaving you with only one loan in first position. Provided your consolidated loan doesn't push your loan-to-value ratio above 80%, you might actually save some money with this approach. Here’s why: mortgage rates are currently well below the interest rates offered on home equity loans, so there's the potential to save a significant amount of interest by rolling your home equity loan into your new mortgage.
For instance, residents of Nevada can apply for a 10-year home equity loan with an interest rate of 9.5% from Citibank (Stock Quote: C) or 10.115% from Wells Fargo (Stock Quote: WFC), or a seven-year loan with a rate of 8.34% from U.S. Bank (Stock Quote: USB). Meanwhile, interest rates offered on 30-year mortgages from these same institutions start at 5.625%, 5.0% and 5.5%, respectively.
If you have a home equity loan or line of credit on your home, consider submitting your subordination request as soon as possible to get the process started. Delaying too long could mean missing out on these historically low rates.