Home equity lenders are throwing roadblocks in front of clients who want to refinance their primary mortgages. In some cases, they delay refinances for a month or more, and in other cases, they block the refinance altogether.

The issue is “resubordination”, which comes into play when a homeowner wants to refinance a primary mortgage and keep the second mortgage in place, either a home equity loan or line of credit.  Before the refinancing can happen, the home equity lender has to agree to let the second mortgage remain where it is, in second position.  That agreement is a resubordination.

You would think there would be no problem for a home equity lender to agree to a situation that improves their current position by allowing the borrower to get a lower payment on the primary mortgage.  Nothing personal, but many equity lenders want borrowers to close their accounts, so they can improve their balance sheets.

How Much Is Your House Worth?

Another issue is the new combined loan to value (CLTV). Let’s say you bought your house for  $300,000 in 2006 and got a primary mortgage of $240,000 and second of $60,000 (a typical 80/20 loan product to avoid private mortgage insurance).  The current value is $270,000 (just a 10% drop in value), so your combined financing is almost 100% of value. Most lenders will run like hell.  They want at least 25% to 30% equity in your house.

Even when a resubordination is probable, it is not unusual to wait for more than a month for a decision.  With this delay and added fees, the refinance process is jeopardized.

A Personal Example

When I first bought my home in late 2003, I took out an Adjustable Rate Mortgage (ARM) just like I was telling all my clients to do. I added in a Home Equity Line of Credit (HELOC) in order to avoid the dreaded private mortgage insurance.  I had a good rate and a low payment.  I thought, for sure, the value of my home would increase and I would easily refinance into a fixed rate mortgage when the time came . I figured I would keep the Home Equity Line of Credit open “just in case”.

Over time, the value of my house did, in fact, increase.  However, when it came time to refinance or face an adjustment in my interest rate because of the Adjustable Rate Mortgage,  the company that had the Equity Line of Credit wanted me to jump through all kinds of hoops.  Meanwhile the primary mortgage company wasn’t going to complete my refinancing without the resubordination agreement.

Luckily, I was able to combine the two into one and close out the Home Equity Line of Credit completely.  Boy, was I irritated.  I almost lost the window of opportnity I had to capture a low, fixed rate all because of the Equity Line.

Thanks to Rob Mercer of First Home Mortgage for providing the backgournd for this blog post.