refinance

Highlights

• Before you refinance, the home equity lender has to resubordinate.
• Another option is to pay off the home equity loan or line of credit.
• Rolling both loans into a refinanced loan can be difficult and expensive.

Having a home equity loan or home equity line of credit when you're trying to refinance your mortgage adds another layer of complication to the approval process.

That's because the second mortgage holder, which is legally entitled to move into first place when the first mortgage is refinanced, has to agree to give up that spot to the refi lender. If you can't strike such a deal, called a resubordination, you'll have three options.

• Pay off the second mortgage.
• Consolidate both loans with the second mortgage lender.
• Forget about the refi altogether.

Most refinancers prefer to go the resubordination route, even though it takes time and often involves fees. And the resubordination rules differ for loans under the Home Affordable Refinance Program, or HARP.

Resubordination costs time and money

Before it can refinance your primary mortgage, a lender must submit a subordination package -- all of the documents supporting the request -- to the institution holding your home equity loan or line of credit. The second mortgage lender typically charges a fee of $75 to $100 to review the package, says Anne Benjamin, chief operating officer at Redwood Credit Union in Santa Rosa, Calif. The response can take up to six weeks, Benjamin says.

Unless there are questions regarding the value of the home, Redwood's resubordination requests to second lien holders are seldom denied, Benjamin says. And when there are such issues, the credit union is unlikely to send the prospective refinancer's request to begin with.

"If the loan-to-value doesn't work upfront, we are not going to recommend that they go down the road with this," Benjamin says.

HARP aims to ease resubordination

HARP allows homeowners to refinance their mortgages, even when they owe more than their houses are worth. The program was revised recently to increase the number of borrowers who can participate. Among the changes is an item that seeks to remove the resubordination hurdle for many applicants with second mortgages.

As before, HARP is available only to homeowners whose mortgages are held or guaranteed by Fannie Mae or Freddie Mac.

"The largest lenders have all agreed to resubordinate their second liens," says Stefanie Johnson, a spokeswoman in the Office of Congressional Affairs of the Federal Housing Finance Agency, which regulates Fannie and Freddie.

But Natalie Brown, spokeswoman for the Wells Fargo Home Equity Group, says her bank is still reviewing the guidelines to determine whether it will automatically agree to take second place behind the new HARP loans. Wells Fargo already approves most resubordination packages it receives from first-edition HARP loan applicants, Brown says.

"The few situations that would cause us to deny the subordination request include those when there are changes in property ownership (for example, collateral vesting changes) or when the home equity account holder is not on the title of the newly refinanced mortgage," she says.

Brown says Wells Fargo typically processes HARP subordination requests within two days and charges fees varying from $50 to $150.

Options when resubordination is denied

If your home equity lender says "no" to resubordination but you still want to refinance, one solution would be to pay off the second loan. Benjamin says Redwood Credit Union will consult with members about the feasibility of doing so.

"We can come back and see if there is some other type of loan that we could do for the member that would pay off the second mortgage in the process -- or the member could decide they don't want to move forward with the refinancing," she says.

The refinancing lender could offer to add the home equity debt to the refinanced mortgage, but Brown says you should consider lending requirements and closing costs first.

"You're essentially applying for a new loan, and there is a chance that current credit guidelines are tighter today than they were when the original loans were obtained," she warns. She adds that you should compare the monthly payments and total interest over the life of the new single loan versus what you have now.

Valerie Cardenas, senior vice president of mortgage lending at International Bank of Commerce in McAllen, Texas, says borrowers often benefit from consolidating because the rates on home equity loans are typically higher than current primary mortgage rates. But if your second loan has a fairly low balance, it might not be worth the cost of combining the loans.

"You also have to consider that there are closing fees involved," Cardenas says. "Just continue to pay as agreed until you eliminate that balance."

Finally, there's the option of keeping both loans as is instead of refinancing. Doing nothing is the easiest course of action, even if it's not always the cheapest.