2nd mortgage *then* refi?
Question: Anyone know why this wouldn’t work:
Let’s say one bought a house a few months ago, current 88% LTV. They now take a home equity loan, say @ 6.5%, then use this cash to pay down the 1st mortage, until the LTV is 80%. They now refi, probably at close to the same rate but w/ no fees, and this time with no PMI since the LTV is now 80%…. thus saving $75 a month or so.
What kinds of problems might arise from the refi lender, regarding the new presence of the home equity loan? Is it just general considerations about credit scores, etc? Or is the lender just going to frown and call the equity loan debt part of the house debt and kill the whole plan? The refi lender probably isn’t going to care about the equity loan, since the 1st mortage (the refi) takes precedence over the equity loan lender in case of a default.
Answer: I don’t think that is correct. Generally the order of priority is based on when the loan was made.The original loan has priority over the home equity loan. But once that original loan is repaid, as will happen in a refi, the home equity loan moves into first place. Which means the refi loan is in *second* place. The refi does not allow you to slip the new loan in front of the existing home equity loan unless the home equity loan lender agrees, which they probably won’t. Which means the refi loan is *not* a first but a second and seconds have higher interest rates, generally. Probably high enough to offset the savings if any, from losing the PMI if, in fact the refi lender does not require it.
I’m sure someone will correct me if I’m wrong, but this is how I’ve always understood it worked.
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