Unintended Consequences of a Home Equity Line of Credit

[Mar 11, 2009.]

 

Consumers that have attempted to refinance their primary mortgage after obtaining a home equity loan or line of credit quickly have realized there were some unintended consequences of taking out their second mortgage.

First, the cost to refinance a first mortgage when there is a second mortgage present is higher than if there wasn't a line of credit or equity loan involved. If refinancing a mortgage that is being purchased by Fannie Mae, a homeowner could be required to pay up to half a point because of the second mortgage. On a $300,000 loan, that half a point represents an extra $1,500 in loan costs.

On April 1st, the fees associated with this type of scenario will be increasing. Homeowners can expect to pay as much as .75 percent of their first mortgage loan amount for keeping their second loan in place.

In addition to the fee imposed by Fannie Mae, most servicers of second mortgages charge a subordination agreement fee. Essentially, the company that services your home equity line of credit will charge a processing fee or application fee to have them evaluate the terms of your proposed new primary mortgage and sign off on whether they will subordinate their loan to the new primary mortgage. This fee can be in excess of $100 - $200.

Finally, the lender that provided your home equity loan may decide not to agree to subordination. They may review the terms of your proposed primary mortgage and the value of your current home and decide it would worsen their position if they allowed you to refinance your primary loan. Often times, the home equity loan company might be worried if you are refinancing into an adjustable rate loan, an interest-only loan, or are taking out a new loan that is a higher amount than what you currently owe.

Those considering obtaining a new equity line of credit or home equity loan should consider how this may impact their ability to refinance their primary mortgage before they apply.

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.