Can I Refinance My First Mortgage Without Refinancing My HELOC?

by Fraser Sherman

Refinancing your first mortgage without touching your HELOC is possible, but it's never a sure thing. A home equity line of credit resembles a home equity loan, but instead of taking a lump sum, you don't draw on the credit until you need the money. The rate is usually cheaper than other types of debt, but the HELOC may become a road block to refinancing.

Lien Priority

Lien priority rules the mortgage world. Mortgages and second mortgages -- which include home equity loans and HELOCs -- come with liens on your property. The rule is that whichever lien is filed first gets paid first if someone forecloses. Before refinancing, your first mortgage is the first lien. When you take out a refi, you pay off that lien and take out a new one. If you already have a HELOC, the HELOC is now the senior, priority lien. First-mortgage lenders won't refinance if it means taking second place behind someone else.

Subordination

To get your refi, you have to get a subordination agreement from the second-mortgage lender. If your HELOC lender signs the agreement, this moves the HELOC lien back to second place in the queue. The bank making your refi loan can then have the priority lien it wants. If your HELOC lender doesn't sign, you're stuck. This can happen if, for example, the HELOC lender doesn't think your house is worth enough to pay off both loans in foreclosure.

Obstacles

Your second-mortgage lender isn't looking to make you miserable, but it does want to turn a profit. Even if the first-mortgage refi is good for everyone -- you get lower payments, so you're less likely to default on either mortgage -- a HELOC lender may refuse to play ball. Many banks hope you'll take out a refi big enough to pay them off, even if it's a worse financial deal for you.

Solutions

You don't have a lot of options if your HELOC lender refuses to subordinate. You won't know until you ask, so apply immediately and see how the lender responds. It may be a no, or a conditional offer, such as taking out the refi from the same lender. If you can't get an answer that works for you, it might be worth scraping together the money to pay off the HELOC.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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