The ready availability of second mortgages both encourages and discourages refinancing, depending on the circumstances.

One Mortgage, Balance Exceeds 80% of Value

In this situation, the first mortgage cannot be refinanced without paying for mortgage insurance. If market rates are low enough, however, refinancing into a combination first and second may reduce the cost by enough to make the refinancing cost effective.

"I have an 8.5% mortgage with 26 years to run, but because my house has depreciated in value I can't refinance the balance without paying for mortgage insurance. A broker has told me that I can borrow 80% of the balance at 7% and the other 20% on a second mortgage at 9.5%. Will this pay?"

Probably it will, depending on the refinancing costs relative to the loan balance, and on how long you expect to be in your house. My spreadsheet program indicates that the break-even period for this deal -- how long you must stay with the new mortgage to cover the refinancing costs --is only a year if your costs are 1% of the balance, ranging up to 4 years for costs equal to 4% of the balance.

Two Mortgages, Total Balances Less Than 80% of Property Value

When there is already a second mortgage and the property has appreciated significantly in value, it may be cost effective to refinance into a single first mortgage.

"I purchased my house a year ago with a $100,000 first mortgage at 7% for 30 years, and a $40,000 second mortgage at 11% for 5 years. With house prices appreciating very rapidly in my neighborhood, I find that I can refinance the balance on both loans at 7%. Is there any reason why I shouldn't?"

Unless you expect to move shortly, go for it. Your break-even period is about a year for refinance costs equal to $1400, rising to 5 years for costs of $5,600.

Two Mortgages, Total Balances Exceed Property Value

When there is a second mortgage but the property has not appreciated, the borrower may be unable to refinance the first mortgage because of the second.

Maybe, maybe not, depending entirely on the second mortgage lender. When you refinance the first mortgage, you pay off the old first mortgage, which results in the second mortgage automatically becoming a first mortgage. To avoid this, the second mortgage lender must agree in writing to subordinate his claim to a new first mortgage. Some second mortgage lenders will agree to do this, since it is no skin off their nose, but others refuse to do it and some will take the position that the only way they will cooperate is if they refinance the first mortgage.