Homeowners can combine their first and second mortgages into one mortgage insured by the Federal Housing Administration. This often helps a homeowner's finances by consolidating the two mortgages into one and lowering the overall mortgage payment. FHA makes this possible with low equity requirements for refinancing. Homeowners have two refinance options when consolidating the first mortgage and the second mortgage through an FHA-insured loan.
If the homeowner does not need more than $500 cash back to closing, a no cash-out refinance program is possible through the FHA. This program allows homeowners to consolidate their first and second mortgages, as long as a second mortgages is at least 12 months old or was used to purchase a home. The homeowner also finances the closing costs and any prepayment penalties charged by the current lenders. The homeowner can even finance the prepaid interest and escrow costs for the new loan. If the homeowner's second mortgage is a home equity line of credit, the homeowner cannot have taken out more than $1,000 in the past 12 months.
The FHA also allows homeowners to consolidate a first and second mortgage and receive more than $500 back to closing. The second mortgage may be less in 12 months old and the homeowner is not required to have used it to purchase the home to qualify for this program. The homeowner can still finance all closing costs, prepaid costs and escrow charges into the mortgage. The home must have at least 15 percent equity at closing to qualify. If the homeowner purchased a home less than 12 months before the new loan's closing, the lender must value the home of the lesser of the appraised value or the original sales price.
Many homeowners obtain a first and the second mortgage when they purchase a house to avoid paying mortgage insurance. Conventional mortgage lenders require homeowners obtain mortgage insurance when the first mortgages balance exceeds 80 percent of the home’s value. Even the homeowners do not have a full 20 percent down payment they obtain a first mortgage for 80 percent of the home’s value and then obtain a second mortgage for 10 or 15 percent of the home’s value. FHA loans require mortgage insurance regardless of amount of equity in the home.
Subordinate the Second Mortgage
One other option homeowners have is to not pay off the second mortgage when they refinance into an FHA loan. FHA allows homeowners to subordinate their existing second mortgage to a new first FHA loan. Subordinating is simply a fancy mortgage term for letting the first lender skip in line on the title. Whoever is listed first on the title receives pay first when the home sells. Usually when the first mortgage lenders paid off, the second mortgage lender moves in first place. FHA requires their loan be in first place on the title, so if there is an existing second lienholder, they require the second mortgage company to subordinate their loan to the new FHA loan. The homeowner has a favorable second mortgage may not wish to consolidate it into the new first mortgage, but can subordinated instead.
- HUD: Refinances
- Bankrate: Second Mortgage may Derail Refinance; DonTaylor
- The Federal Reserve Board: A Consumer's Guide to Mortgage Refinancing
- Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?" Accessed Oct. 31, 2020.
- Internal Revenue Service. "Publication 936 (2019), Home Mortgage Insurance Deduction." Accessed Oct. 31, 2020.
David Rouse, currently residing in Raleigh, N.C., has been writing and teaching home owners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and conducted informational first-time home-buyer seminars, providing make-sense answers for a long and confusing process. He studied at Western Kentucky University.