Why can’t I refinance?

Question

Hello all,

I'm hoping someone can explain this to me.

For context, we have a HELOC out on our duplex and we have owned our house since September of 2022. I don't understand why we can't refinance our house without touching the HELOC?
I don't need to wrap the HELOC into the home loan and I don't need to pull out any equity.

Can someone please explain why I can't just refinance the house?

Samantha

John Clark · Answer

Lien priority. Lien priority is usually determined by the date it was recorded against the house. When you refinance, you eliminate the original mortgage, so the HELOC pops up into first place. The new mortgage would be in second place. The bank refuses. The holder of the HELOC needs to agree to subordinate to the new mortgage being obtained, and the subordination agreement recorded along with the refinancing mortgage, to show that the refinancing mortgage has priority.”first in time, first in line.”

Frankie Vozzi · Answer

Hi Samantha, This usually comes down to how the HELOC is positioned on the property.

In most cases, the HELOC is recorded as a second lien, so when you refinance the primary mortgage, the new lender wants to be in first position. That means the HELOC lender has to agree to “subordinate” (stay in second position behind the new loan).

If they don’t allow that or if the new lender doesn’t want to deal with it, it can block the refinance, even if you’re not touching the HELOC balance.

It’s less about whether you need the HELOC included and more about lien position and lender requirements. I work with investors on refi scenarios. sometimes it’s just a matter of structuring it with the right lender.

Did they mention anything about subordination when they denied it?

Stephanie Medellin · Answer

I understand, but the refinance lender for your first mortgage will still be concerned about the total owed on the property, or the potential amount that could be owed if the full HELOC credit line is drawn.  That's where the combined loan-to-value comes into play.  If your HELOC puts you over the limit, that could be one reason you're having difficulty refinancing the first.  If the property value is high enough, then you should just need the re-subordination agreement from the HELOC lender to stay in 2nd position.

Jack Taylor · Answer

If you haven't gone to a lender who specializes in loans for investors, I would suggest doing so. It does sound like a lien-priority issue, but if your duplex is collateralizing your HELOC, they should not be treating it as an issue for a refi on your primary.

Erik Estrada · Answer

You actually can do this with a DSCR loan. You will need to get a subordination agreement from your HELOC lender, and as long as the term is longer than 10 years, you should be able to refinance the 1st while keeping your second in tact.

I have had a similar instance for a client that has a 0% interest rate for an ADU HELOC and she did not want to touch it.

Stephanie Medellin · Answer

As others already mentioned, you can refinance just your house (duplex) as long as you get a subordination agreement from the HELOC lender.  Your lender should be able to help you with this, and it can take some time to process.  It also can't always be requested upfront; some HELOC lenders may want a copy of your appraisal or information on your new loan terms before they will agree.  There may also be a fee.  You also want to make sure your combined loan-to-value is under the maximum allowed (you need enough equity to refinance after factoring in your credit line).

Samantha Chacon-Johnson · Answer

@Jack Taylor I agree.

Ikenna Okafor · Answer

@Samantha Chacon-Johnson

Banks and financial institutions typically require a first lien position on a property to secure their investment, and lien priority is determined by the order in which liens are recorded.

A HELOC usually holds a second lien position because it is recorded after the primary mortgage, which occupies the first lien. However, when the primary mortgage is refinanced, its original lien is paid off and released. This can temporarily elevate the HELOC into the first lien position.

Since the new lender does not want to be in a subordinate (second lien) position, they often require the HELOC to be subordinated or paid off/refinanced as part of the transaction so the new loan can assume first lien priority.

Hope that clarifies things.

Samantha Chacon-Johnson · Answer

@Jack Taylor the duplex is my primary. I live in onside and rent out the other.

Samantha Chacon-Johnson · Answer

@Erik Estrada This is great information for the future. But I am in a house hack and I don't think DSCR's apply to me.

Why can’t I refinance?

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