Refinancing a Second Mortgage: Everything You Need To Know

A second mortgage can be a lifesaver when you need to tap into your home's equity. But circumstances change. 

Maybe interest rates have dropped since you took out that HELOC or home equity loan. Maybe your credit score has improved dramatically — or you're just tired of juggling multiple monthly payments. In the right context, refinancing your second mortgage could save you thousands of dollars and simplify your financial life.

This article breaks down refinancing a second mortgage, from how the process works to benefits and potential drawbacks.

What is a second mortgage?

A second mortgage borrows against your home's value while keeping your original mortgage in place. Second mortgages let you access the equity you've built up, turning your "paper wealth" into real cash you can use now.

Second mortgages have two main types:

— Home equity loans: These give you all the funds upfront in one lump sum. Your interest rate is fixed, which means monthly payments stay the same from signing the paperwork to making the last payment. This makes home equity loans a good option for one-time expenses where you know how much you’ll need in advance, like paying for a child’s college tuition.

— Home equity lines of credit (HELOCs): This type of second mortgage works more like a credit card. You get approved for a certain amount, but you only take what you need when you choose to. You pay interest only on the amount you use, but the variable interest rate goes up and down with the market.

What about second mortgages versus refinancing? Refinancing is when you replace your current mortgage with a brand-new one, usually to get better loan terms or interest rates. You still end up with one mortgage payment — just with new terms.

A second mortgage, on the other hand, adds a completely separate loan on top of your existing mortgage. You have two distinct monthly payments to manage, each with its own interest rate and repayment schedule.

Can you refinance a second mortgage?

Yes, you can refinance a second mortgage. There are two main ways to do it:

1. Refinance the second mortgage itself

This works similarly to refinancing a first mortgage. You take out a new second mortgage with better loan terms to replace your existing one. This might work if your primary mortgage already has solid terms you don't want to change.

For example, you might want to refinance a variable-rate HELOC into a fixed-rate home equity loan for more payment stability and protection from future interest rate increases.

2. Consolidate both mortgages

You can also refinance your first and second mortgages together into a single new loan. If you secure a lower interest rate, this can mean substantial savings. It also simplifies budgeting because you have just one monthly payment to manage.

One possible option for consolidating your mortgages is a cash-out refinance, which lets you replace your existing mortgages with a new, bigger loan and get the difference in cash. A cash-out refinance can be a good option when interest rates are low, since you can secure a lower rate and save on interest payments.

When to refinance a second mortgage

Refinancing a second mortgage isn't right for everyone. Here are some of the most common situations when it can make financial sense:

— Lower rates: Interest rates could have dropped significantly since you took out your second mortgage. Even a 1% reduction can save you thousands over the life of your loan.

— Better credit: If your credit score has improved, it could qualify you for better interest rates than when you took out your first loan.

— Consolidating payments: When balancing multiple loans, you might want to consolidate them into a single mortgage with just one monthly payment for simplicity.

— HELOC draw period ending: The HELOC draw period has to end at some point, and you face higher payments as you enter the repayment phase. Refinancing to a fixed-rate loan could make these payments lower and more predictable.

— Rate stability: You might want to switch from a variable to a fixed-rate loan to protect yourself from future interest rate increases and make budgeting easier.

Refinancing might not be worth it if:

— Planned move: If you want to move or sell your home within the next few years, the closing costs might outweigh your savings.

— Prepayment penalties: Your new loan comes with significant prepayment penalties that would offset any refinancing benefits.

— Competitive rates: If your current interest rate is already competitive with today's market rates, it’s worth it to keep what you have.

Whether it's a cash-out refinance or a second mortgage, Better takes the pain out of making your move. You can get pre-approved in as little as 3 minutes using a streamlined online application and use the refinance calculator to instantly see your potential savings. If approved, you could get up to $500,000 at a competitive rate with no hidden fees.

...in as little as 3 minutes – no credit impact

How to refinance a second mortgage in 5 steps

Refinancing your second mortgage is usually a straightforward process. But it's still smart to be prepared so you can land the best possible terms. Here's what to do:

1. Prove your income

Gather recent pay stubs, W-2 forms, tax returns, and other documents showing stable income. Lenders want to see that you can reliably make your mortgage payments, and one part of that evaluation means demonstrating you have stable employment.

2. Review your credit score

Your credit score has a major impact on potential interest rates. The higher your score, the better. Before applying, double-check your credit report for discrepancies and make a plan to improve your score if necessary.

3. Check your debt-to-income ratio

Lenders prefer that your debt-to-income ratio (DTI) is no more than 43%. That means all your monthly debt payments — including your current mortgages, car loans, student loans, and minimum credit card payments — shouldn't add up to more than 43% of your gross monthly income.

4. Calculate your loan-to-value ratio

Lenders want to see that you've built up solid equity in your home before extending an offer. They measure this by looking at your loan-to-value (LTV) ratio, which divides your current mortgage balance by your home's current market value. Lenders typically require you to have at least 15-20% equity remaining in your home after the refinance goes through to get approved.

5. Understand resubordination

If you're refinancing your first mortgage but keeping your second one, most lenders will require you to request a resubordination from your second mortgage lender. This is their formal agreement to stay in second position (or “second lien”) behind your new first mortgage. That means the lender for your first mortgage will still get paid first in the case of foreclosure.

Some second mortgage lenders charge a fee for this service, and not all will automatically agree to the resubordination in the first place, so start this process early.

Better Mortgage, on the other hand, has streamlined the process. You can see what you qualify for in as little as 3 minutes, without impacting your credit score. If you decide to move forward, you can lock in your rate and upload the appropriate documents all online for a streamlined, easy experience.

...in as little as 3 minutes – no credit impact

Pros and cons of refinancing a second mortgage

Taking a look at the pros and cons of refinancing a second mortgage can help you determine if this option aligns with your financial circumstances or could set you back.

Pros

— Lower monthly payments: Refinancing to a loan with a lower interest rate or longer loan terms can reduce your monthly payments, freeing up cash flow for other financial goals.

— Simplified finances: Consolidating first and second mortgages eliminates the hassle of managing multiple loans and payment due dates.

— Payment stability: Converting a variable-rate HELOC to a fixed-rate loan lets you steer clear of future interest rate increases and makes budgeting more predictable.

— Potential tax benefits: The interest you pay on home equity debt used for home improvements may be tax-deductible, though interest for other purposes (like debt consolidation) typically isn't.

Cons

— Upfront costs: Refinancing costs money. Closing costs typically range from 2-5% of the loan amount.

— Foreclosure risk: Your home serves as collateral for the loan. That means if you can't make the payments, you could lose your property. Never refinance unless you're completely confident in your ability to maintain the new payment schedule.

— Potential for more debt: While refinancing can provide temporary financial relief, it doesn't address underlying spending issues. Without a good budget, you might find yourself accumulating more debt.

Simplify your second mortgage refinance with Better

Refinancing your second mortgage has never been easier. Whether you want to reduce monthly payments, consolidate debt, or even purchase a second property, Better has your back.

Better's smooth online application process gets you pre-approved in just 3 minutes with competitive rates, no origination fees, and closing times up to 10 days faster than other lenders. Apply today.

...in as little as 3 minutes – no credit impact