Refi’ing with a HELOC? Bird-dog your lenders

Trying to refinance your primary mortgage when you’ve got a home equity line of credit can be a real challenge these days.

If you don’t have enough equity–and “enough” varies by lender–your HELOC lender may refuse to “subordinate,” or agree to stand in the credit line behind your new first mortgage.

That can sink your deal, unless you can pay off and close the HELOC.

Even if you’ve got plenty of equity and great credit scores, though, you can run into problems getting the subordination because the big surge in mortgage refinancing has caught many lenders short-handed. I learned that after sitting on hold with Washington Mutual’s subordination department–for an hour, and I still didn’t get through.

“Second mortgages have been a sticking point through this entire credit meltdown,” said Elizabeth Razzi, Washington Post real estate columnist. Subordinations aren’t a high priority for banks these days, and some lenders have pulled bodies from their subordination departments to work on loan modifications and refinances.

The delays can be so long that you may face losing that great interest rate you thought you had locked in.

For its part, WaMu–now owned by Chase–says it recognizes the subordination logjam and is trying to do something about it.

“Due to increased demand for refinancing, delays in re-subordination are an industry-wide issue,” said Chase spokesman Gary Kishner.  “Both Chase and WaMu are adding staff to handle increase in demand for re-subordinations.”

As a borrower, you shouldn’t sit passively and hope everything works out all right. Instead, you should:

Get the subordination started early. Urge the lender with whom you’re refinancing to submit the subordination request to your HELOC lender right away. Follow up with phone calls to the HELOC lender to make sure the request has been received and processing has begun.

Keep tabs. Call your refi lender and your HELOC lender every few days to make sure your loan and subordination are progressing smoothly. If there are problems or missing paperwork, address them promptly.

Try to elbow your way to the front of the line. If your rate lock is within two to three weeks of expiring and your subordination hasn’t been approved, contact your HELOC lender and demand (politely) that your subordination request be “escalated,” or given top priority.

Find a back door. If you can’t get through to the subordination department’s main line, ask the phone reps if there is a fax number or email address you can use. At Chase, call 877-437-0493.  At WaMu, fax a copy of the rate-lock expiration to 904-462-3643 or email it to subordinationagreements@wamu.net. Kirshner said faxed escalated rate lock expirations will receive an acknowledgement phone call from the representative processing the prioritized request.

Consider a Plan B. Your refinance lender may be willing to give you more money in a cash-out refinance to pay off and close your HELOC. If not, you may be able to pay off the balance by borrowing elsewhere, such as from a 401(k)–but don’t even consider that if your job isn’t rock solid, since 401(k) loans can become inadvertent withdrawals if you lose your job and can’t pay the money back promptly.