Home equity loan can often be kept while refinancing

Line of credit subordination is possible if your lender is willing

Much has been written, here and elsewhere, about the usefulness of a home equity line of credit, or HELOC, as they are known. Unlike a traditional home equity loan, a line of credit is more flexible, as it can be used a little bit at a time as needed. The rates are adjustable, the repayment is more flexible and it often makes a better all around choice for a second mortgage.

Another great reason to have a line of credit is for emergencies. If you lose your job or cannot work for a while after an accident, your line of credit offers a tremendously flexible source of funds, which you can tap as needed. You never know when an emergency may arise, so a HELOC is a great financial tool to have in your arsenal. If you do not have one, it would be a good idea to get one. Lenders are quite reluctant to lend money to someone who does not have a job.

But what if you refinance? Usually, when a home loan is refinanced, all the existing mortgages have to be paid off. Is it possible to keep a home equity line of credit while refinancing your mortgage?

The answer is a surprising, “maybe.” It depends mostly upon your lenders, who have to give permission for you to do so. Both the holder of your new home loan and the holder of the HELOC must grant permission for you to do so. The process of keeping a HELOC while refinancing is known as “subordination”, which is sort of a fancy way of saying that the HELOC will take second place to the primary mortgage.

That’s true, and as such, the holder of your HELOC will want to make sure their interests are secure. Should they agree to allow you to subordinate, they will probably require you to apply by filling out one or more forms and to pay a fee of several hundred dollars. In addition, they will have requirements about your primary mortgage:

• They will probably insist that it have a fixed interest rate.
• They will probably insist that your primary mortgage payments be no higher than they were before.
• They will insist that you be up to date on all of your mortgage payments, including those of other properties.

The primary lender, should they agree, will probably be willing to finance no more than 80% of the value of the property after the value of the HELOC is deducted from the appraised value. You may find that while both lenders are concerned about having two mortgages on the property, the HELOC lender is more concerned. After all, their interests are going to be secondary to those of your primary lender.

The process of subordination is a complicated one, and you may have to shop around a bit to find a lender who is willing to work with an existing financial obligation. Still, if you find an experienced loan officer who is willing to work with you, then you can probably keep your existing HELOC and for all practical purposes, have your cake and eat it, too.