When Refinancing to Consolidate Mortgages Is Impossible or Impractical


Are you considering refinancing to consolidate multiple mortgages? With rates so low today, this can be a great way to reduce monthly payments and interest costs over the life of your loan, but unfortunately, it’s not always easy to accomplish. If consolidating mortgages is either not practical or simply impossible, there may still be some good loan options for you.

It’s no secret that lending guidelines are far tighter today than they used to be, so depending on what kind of second mortgage you have, when you took it out, and the total combined amount you owe on your mortgages, it may not be as easy to consolidate today into one loan as it was in past years.

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The following are some common scenarios where consolidating multiple mortgages is either impossible or provides little benefit:

  • You have a very low rate on your second mortgage. If you already have a low interest rate on your second mortgage (HELOCs often have very low rates today), it may not make sense to refinance and combine it with your first mortgage.
  • Cash out refinance limitations. If you have a HELOC that you took out after you got your first mortgage, consolidating both loans may be considered “cash out” financing and subject to cash out loan-to-value limitations. Most banks tend to limit cash out loans to around 80% of the value of the home (lower if you have a “high balance” loan greater than the $417,00 conforming limit for most areas), so if you owe more than 80% between your mortgages, consolidating may not be an option at all unless you’re willing to pay down your loan balance.
  • You will soon pay off your second mortgage. If your plan is to pay off your second mortgage in the next few years, it may not make sense to stretch it out again by consolidating into a new first mortgage unless you really need the lower payment.
  • PMI may wipe out all the benefit in the new loan. If the total combined loan amount is greater than 80% of the value of your house, you’re going to end up paying a monthly mortgage insurance (PMI) premium. Unless consolidating results in a significant drop in your payment, the PMI may wipe the benefit in the new loan.

If your plan was to consolidate your mortgages but there’s no benefit in it or it’s impossible to do because of lending guidelines, ask your lender about redoing just your first mortgage and leaving your second mortgage intact in a subordination transaction. This is not as simple as a refinance transaction not involving a subordination, it may still provide you with benefit.

The following are some important considerations when evaluating loan options involving a subordination:

  • The process is typically longer than a refinance not involving a subordination. Subordinations must be authorized by your second lien holder and can often take 2 to 6 weeks (sometimes more) to process.
  • You’ll likely be charged a processing fee. Depending on who your second mortgage holder is, you’ll likely be charged $30 to $300 as a processing fee. Note that this fee is not being charged by the bank you’re refinancing with, but your second mortgage holder.
  • You may not be able to lock your rate right away. As I mentioned, the processing of the subordination request can take some time, so don’t be surprised if you can’t lock your rate right away. Rate locks are usually done for 30 to 45 days, and if the subordination takes longer than that, you could end up paying relock fees.

Even with the above considerations, a subordination could be a very beneficial loan option. I’ve worked with clients who were able to consolidate, but a subordination option ended up saving them significantly more money on a monthly basis and over the long term.

If you’re considering consolidating mortgages, you might ask your consultant to run some subordination options as well to see if it can benefit you more.


About Author

Mark Fitzpatrick is a real estate investor and veteran mortgage consultant with Lenox Financial Mortgage Corporation dba Weslend Financial based in Irvine, California. His unique combination of real estate investing and mortgage financing experience enables him to offer exceptional knowledge and service to his mortgage clients.

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