Home Equity Lender Can Block Your ReFi

With mortgage rates at historic lows, many homeowners are looking to save some cash by refinancing at a lower rate, a move that can shave serious money off a monthly mortgage payment.

With mortgage rates at historic lows, many homeowners are looking to save some cash by refinancing at a lower rate, a move that can shave serious money off a monthly mortgage payment. But homeowners who have a home equity loan or a home equity line of credit in addition to their primary mortgage may find that the equity lender can block the refi.

When a homeowner with both a primary mortgage and an equity loan wants to refinance, the equity lender must agree to let the second mortgage remain in the second position rather than becoming the primary mortgage. An equity lender can tie up this process, called resubordination, delaying a refinance for months or even blocking it entirely. The equity lender may also charge a fee of anywhere from $50 to $250 to process the resubordination request, even on those applications that it denies. In addition, a homeowner may face other fees to extend locked-in interest rates while waiting for a decision from their equity lender.

According to some banking industry observers, a primary reason for the delays and denials is that banks are hoping that homeowners will pay off equity loans and lines of credit, putting cash back on a bank’s balance sheet and lowering the risk of default. Faced with a possible denial, a homeowner who can’t afford to pay off an equity loan may be able to consolidate the primary and secondary loans with the same lender. If that’s not an option, refinancing is out the window.