Hierarchies are everywhere, including in the mortgage world. Many people have a subordinate mortgage in the form of a home equity line of credit or home equity loan.
A subordinate mortgage is secured by your property but sits in second position, if you have a primary mortgage, for getting paid in the event you default.
Here’s what you need to know about subordination and why it matters.
Table of Contents
Key Points
• A subordinate mortgage is secured by property and ranks below a primary mortgage in priority for repayment upon default.
• Mortgage subordination ensures order of payment in foreclosure, with primary mortgages paid first.
• Subordinate mortgages include home equity lines of credit and home equity loans, which are riskier for lenders.
• Subordination clauses in mortgage agreements confirm the priority of the primary mortgage over subsequent liens.
• Refinancing a primary mortgage may require a subordination agreement from the second mortgage lender to maintain order.
What Is Mortgage Subordination?
Mortgage subordination is the process of ranking debts tied to your home in the order that they need to be paid in the event of a foreclosure. Whichever mortgage lien is recorded first usually has higher priority than those that are recorded later, but depending on state law, property tax liens, HOA “super liens,” and mechanic’s liens may have priority over previously recorded liens.
After a foreclosure, a second mortgage is only paid if there are funds left over after paying the primary mortgage.
Lenders that make second mortgages — also called junior mortgages, second liens, or junior liens — typically allow borrowers to tap only a portion of their home equity to help ensure that they will get paid in the event of a foreclosure.
And a subordinate mortgage represents a higher risk to the lender, so borrowers will likely see higher rates.
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Recommended: Understanding Mortgage Basics
What Are Mortgage Subordination Clauses?
A mortgage subordination clause is typically included in the legal documents of the primary mortgage holder.
The subordination mortgage clause states that all other loans made using the property as collateral are subordinate to the primary mortgage, now and in the future.
What Is a Subordinate Lien?
A lien is a claim against your property. Generally, there are voluntary mortgage liens, such as mortgages you take out, and involuntary liens, like judgment, tax, HOA, and mechanic’s liens.
A subordinate lien is a claim against your property that usually can only be paid after the primary lien has been paid.
How Does a Mortgage Become Subordinate?
When a mortgage is subordinate to another, it simply means that the lender of the subordinate mortgage will get paid only after the senior lienholder is paid.
Again, mortgages are typically ranked in the order they are originated and recorded in county land records. The primary mortgage is first, and a second mortgage is subordinate because it came after.
If a property is refinanced, the situation changes.
Subordinate Mortgages and Refinancing
If a homeowner has two mortgage loans and wants to refinance the first mortgage, most refinancing lenders will ask the second mortgage lender to sign a subordination agreement to stay in second position after the refinance.
If the second lienholder balks at subordinating that loan, you may have enough equity to apply for a cash-out refinance and use the extra money to pay off the second mortgage. Or you could pay off the second mortgage with cash on hand.
This mortgage calculator can help you run the numbers to see if refinancing is right for you.
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Subordinate Mortgage Loan Modification
Loan modification is a mortgage relief program in which the terms of the loan are changed so that the homeowner can better meet the monthly payment requirement.
Homeowners who anticipate a permanent change in finances, or are exiting mortgage forbearance but don’t qualify for refinancing, can ask for mortgage modification.
If you have a HELOC or home equity loan and you’re struggling to make the payments, the lender may be willing to modify the credit line or loan: lowering the rate, extending your repayment term, or reducing your principal balance.
The Takeaway
Though lenders are more concerned about subordinate mortgages than you may be, you may want to know how second mortgages and other liens may affect refinancing your primary mortgage.
Whether you want to refinance or you are shopping for a mortgage, SoFi is here to help.
SoFi offers a range of home mortgage loan options and competitive rates to meet your needs. Knowledgeable loan officers will guide you.
FAQ
What type of mortgage is subordinate?
If a homeowner has a first mortgage, home equity lines of credit and home equity loans are examples of subordinate loans. They will be paid second in the event of a foreclosure or cash sale.
Is a subordinate mortgage a second mortgage?
Yes. A second mortgage is a subordinate mortgage because it came after the primary mortgage.
What is subordinate financing?
Subordinate financing is a junior loan secured by an asset that can be sold if the loan is unpaid for a specified amount of time. Interest rates and terms can be more favorable than those of unsecured loans but not as favorable as those for a first mortgage.
How long does it take to subordinate a loan?
On primary loans, subordination is included in the contract. On a subsequent refinance when there is a junior (or subordinate) mortgage, the amount of time it will take to reach a subordination agreement will depend on the lenders involved, but it can often be done in 25 business days.
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