Some HELOC lenders are no longer agreeing to first-mortgage refinances, forcing customers to either payoff or refinance their HELOCs before refinancing their original home loans.

How Can This Happen?

When a borrower takes out a HELOC, the HELOC lender agrees to be subordinate to the first mortgage lender. In a nutshell: if the home must be foreclosed on the first mortgage lender will be paid first. The HELOC lender will be paid second, with any remaining money.

If a borrower chooses to refinance his first home loan, he must seek approval from the HELOC lender. The HELOC lender must agree to be placed subordinate (second-in-line) to the new loan. Prior to the housing decline, HELOC lender approvals were routine and almost always granted.

Now, some lenders have decided to decrease their undesirable HELOC lines by declining first mortgage refinances.

The Wall Street Journal reports:

“In some cases, homeowners who in the past would have been easily approved for a mortgage refinancing are finding that they can’t get their home-equity lender to give the go-ahead, which is required to complete the transaction. Others are being told by their home-equity lender that they need to reduce the size of their loan or line of credit.

Approvals from home-equity lenders used to be routine, particularly if the borrower wasn’t increasing the size of the mortgage as part of the transaction. But that’s no longer always the case — even in places where the housing market hasn’t been hit by huge price declines…

Many mortgage refinancings continue to go through without a hitch. But some homeowners who want to lower their rates or lock in a fixed-rate mortgage can’t, even if refinancing would save them money and put them in a better position to repay their loans.”

What Does This Mean for HELOC Customers?

Keep in mind that the majority of banks are not yet prohibiting first mortgage refinances. Those affected have three choices: they can stay in their current position, they can pay off their HELOC, or they can refinance their HELOC with a lender that allows first mortgage refinances. Finding a new HELOC lender can be very difficult right now.

There is no way to tell if these refinancing prohibitions will continue to spread to other lenders, much like the HELOC freezes we saw beginning in January. If you have a HELOC and a principle mortgage with a variable interest rate, you may want to refinance now. If your lender is not already prohibiting first mortgage refinances, it may choose to do so in the future.

See Also: What to Do if You’re Hit By the HELOC Freeze

Tags | Heloc, home equity loan, lenders, mortgage, refinance