Home Loan Subordination Explained

In order to successfully understand the home refinancing process, you should learn some of the key terms that underlie the process. The two key elements involved in the home refinancing process are lowering your interest rate while at the same time helping lower your month-to-month home mortgage payments by adding an additional, secondary mortgage. The term subordination might come up in some instances during the home loan refinancing process.

If you already have two mortgages on your home, this is where subordination becomes applicable. In order to subordinate a loan on your house, the primary lien holder, or lender, must notify the junior lien holder that the primary loan is being refinanced. This notification serves as a request to ask the junior lien holder to remain in a subordinate, or secondary, position while the primary lien holder is refinancing their lien.

In simpler terms, if you’re considering refinancing your first mortgage without paying off your already-existing second mortgage or, in the alternative, a line of credit, the secondary lien holder has the right to move into primary lien holder position under certain circumstances. The first situation where this would apply is if the secondary lien or line of credit is not paid off by the refinance of your first mortgage. In that instance, the secondary lien holder could move into the primary lender position.

When the primary lien holder never makes a request to subordinate, this is another example of when the secondary lien can move into primary position. Asking the secondary lien holder to remain in a subordinate position while the refinancing is taking place and after it is over is what the primary lien holder must make in its request. The secondary lien holder can move into first position if this request never happens.

If you already have two home mortgage loans, subordination is consequently an integral part of the home refinancing process. If it is subordinated during the refinancing process, your home equity loan is also kept open and accessible. Since the fees are radically smaller than the cost of having to open an entirely new credit line once it has already been close, subordination can additionally be a benefit.

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