2nd Mortgage and Subordination

While many borrowers have never heard of subordination, some of them will invariably find themselves in a position where the term is important. Suppose a borrower purchases a house with a standard fixed rate mortgage.

Later on, the borrower takes on a 2nd mortgage to get cash for improvements to the home or for a multitude of other reasons. Even later down the line, interest rates fall and the borrower wishes to refinance the first mortgage to take advantage of a lower rate.

At this point, the borrower must deal with the concept of subordination. In order to refinance her first mortgage, the borrower must get the lender on the 2nd mortgage to agree to be subordinate to a new loan. Though the lender was already second in line to the first mortgage, he must still agree to assume a secondary position relative to the new loan.

Most lenders agree to this arrangement as long as the refinance does not have a higher balance than the original loan. This is because the change in lender on the first mortgage really does not negatively impact the 2nd lender in any way.

If anything, the 2nd lender’s position is strengthened, since lower interest rates for the borrower should theoretically improve her ability to pay the 2nd loan. The only real downside for the 2nd lender is filling out some extra paperwork on the transaction.

However, there are some lenders who refuse to approve subordination under any circumstances. When getting a 2nd mortgage you should ask about subordination, even if you don’t believe you will refinance your first mortgage at the time.

If the lender you are dealing with categorically refuses to subordinate, go elsewhere. If he | she agrees to subordinate, find out if there are any fees or extra conditions that apply. If the lender’s answers are to your liking, make sure to get them in writing.

Subordination really isn’t difficult, as long as you make some basic plans for it before getting your 2nd mortgage.