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Subordinate HELOC to refi

Do I have to subordinate my HELOC, which has a $0 balance, if I want to refinance my home?

Do you have to close your current HELOC when you refinance your first mortgage if the HELOC balance is zero? Our HELOC is with Bank of America and we have a great variable interest rate at 3.25%. I would like to avoid having to go through the hassle of applying for and paying any fees for another HELOC if we refinance. Besides, the new rates would be higher. Thanks.

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Highlights

  • Learn about loan subordination means and why it is done.
  • Understand how to refinance with an open HELOC.
  • Nothing requires a junior lender to agree to subordinate.

your primary mortgage is in the first position and your home equity line of credit (heloc) is in the second position. that means the first mortgage has priority, when it comes to collecting on the loan, as the primary lien holder. if you refinance your first loan, the first position loan gets paid off in the process causing the heloc to move from second position to first position. by refinancing, whether from your current lender or another lender, the new loan drops into second position. because that loan is for a higher dollar amount, the lender will not accept secondary position.

to find the best refinance loan, contact one of bills.com's lending partners. you will receive a free, no obligation refinance quote.

loan subordination

the way around this is to have the holder of the second loan agree to subordinate its position. that means getting the heloc holder to agree to stay in secondary position, yielding the first loan position to the new refinance of your primary mortgage. subordinations are agreed to on a case-by-case basis. different lenders have different rules.

combined loan to value (cltv)

the primary issue is your combined loan to value (cltv). your cltv is determined by adding the balances on the two loans together and viewing that total as a percentage of your homeâ’s current market value. the general rule is as long as the cltv is 85% or less, then the existing second lender will agree to subordinate. a first lender may accept a higher cltv, but it is the heloc lender that is stricter.

even though your heloc currently has no balance, the lender is going to use heloc's maximum credit limit to determine your cltv, because you could go out and use the money available on your open line of credit whenever you please. this heloc holder is concerned about not being exposed to an unacceptable risk. for example, say you want to refinance a $200,000 loan on a home worth $250,000, with a $0 balance on your heloc, but an available line of credit on the heloc of $55,000. the heloc lender is concerned that if you were to max out your credit line and then were forced to sell your home, for some reason, they would not get all of their money back. with house prices in many parts of the country having fallen so much, the holder of the heloc wants to make sure that they build in a safety factor, protecting their position. this is why there is the general rule of a maximum 85% cltv, from the heloc lender's point of view. it is also possible that the heloc loan servicer may agree to subordinate but on the condition that the homeowner slash the available balance.

it is perfectly understandable that you would want to keep open your existing heloc with its low interest. subordinating your home equity loan will keep it open and available, while refinancing your first mortgage, preserving your low home equity rate. it will also save you fees that you would pay, were you to have to open a new line of credit. there are usually some fees associated with the loan subordination, though the fees are much smaller than the fees you would pay to open a new line of credit.

recommendation

nothing requires the heloc lender to agree to subordinate its position; it is solely the lender's choice. if the heloc lender is unwilling to subordinate, the only way to refinance would be to close out the heloc. this is not your first preference, so i recommend that you speak to them and see if they are willing to subordinate. quite often, the loan officer that you are working with on your refinancing will be able to assist you in the subordination of the heloc.

here is a great source for general information about helocs.

i hope this information helps you find. learn & save.

best,

bill

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2 Comments

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  • BA
    Sep, 2010
    Bill
    As far as I can determine, there is no binding rule on the mortgage lending industry for maximum CLTV percentage. Each lender makes its own rules. You may want to find out what lender the mortgage broker used on your application and then check directly with the lender to find out the timeline on the 85% CLTV restriction they have put in place.
    0 Votes

  • 35x35
    Sep, 2010
    Cal
    When did this 85% CLTV rule (with a HELOC) become a hard and fast rule (or law)? July, 2010 . . . or more than 90 days ago? My refi. broker just refused my application because of this rule and they claimed that it was established in the last 30 days -- and they kept my $500.00 application fee. If it was observed by the "industry" before July 15, 2010 (my date of application) then I will sue them for my app. fee -- because they should have known that my application would never have been approved. Again: when did this 85% CLTV rule come into play? For further research purposes -- what is the rule's name Or number? Thank you for your time.
    3 Votes

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