What is a subordination agreement, and why does it matter?
Let’s say you are looking to refinance your existing first
mortgage but you have a home equity loan, too.
The new lender will not make a “second lien mortgage,” that’s where the
subordination or, as it’s sometimes called in New Jersey a postponement of
mortgage, comes into play.
Refinancing your home comes with a fair share of paperwork.
If you have a home equity loan or line of credit, one document required by the
new lender may feel particularly troubling: the subordination agreement. Don’t
be scared by the name because obtaining a subordination agreement has become a
normal part of the mortgage refinancing process.
Here are the basics of subordination, using an existing home
equity line of credit (HELOC) as an example.
What is subordination?
Subordination is the process of arranging the priority of
home loans (mortgage, HELOC or home equity loan) by order of importance. When
you have a home equity line of credit, for example, you actually have two loans
– your mortgage and HELOC. Both are secured by a lien on your home at the same
time. Through subordination, lenders assign a “lien position” to these loans.
Generally, your mortgage is assigned the first lien position while your HELOC
becomes the second lien.
Why does subordination matter to the new lender?
In a foreclosure, your mortgage and HELOC must be paid off
with the equity in your home. Unfortunately, a home’s equity cannot always
cover the full cost of both loans. Subordination addresses this problem with
pre-established lien positions.
The first lien is always paid off first. (In this case,
that’s your mortgage.) Equity can only be allocated to pay off the second lien
once your mortgage is paid in full. If there were a third lien, it would be
paid off after the second lien. And so on.
When there’s not enough equity to cover what’s owed on your
second lien, the HELOC lender loses money. Subordination cannot magically pay
off loans, but it does help lenders estimate risk and set appropriate interest
rates.
How does subordination affect refinancing?
Refinancing is the process of paying off your old mortgage
and replacing it with one with better rates and terms. When your mortgage is
paid in full, the second lien (HELOC) automatically bumps up in priority. Your
HELOC becomes the first lien, and your new mortgage becomes the second lien.
Unsurprisingly, mortgage lenders don’t like the risk
associated with a second lien. Indeed, some lenders can only make first
mortgage liens. A subordination agreement allows them to reassign your mortgage
to first lien and your HELOC to second lien position.
What can you expect?
Most subordination agreements are seamless. In fact, you may
not realize what’s happening until you’re asked for a signature. Other times,
delays or fees may take you by surprise. Here are a few important notes about
the subordination process.
Subordination agreements are prepared by your lender. The
process occurs internally if you only have one lender. When your mortgage and
home equity line or loan have different lenders, both financial institutions
work together to draft the necessary paperwork.
Some financial institutions charge a subordination fee
and/or other fees, such as appraisal fees.
Delays can occur, especially if you have two lenders. We
encourage you to manage this situation to ensure that your subordination
agreement is completed before the loan closing date. Your home equity loan or HELOC may be frozen or closed
temporarily until the subordination agreement is processed.
Despite its technical-sounding name, the subordination
agreement has one simple purpose. It assigns your new mortgage to first lien
position, making it possible to refinance with a home equity loan or line of
credit. Signing your agreement is a positive step forward in your refinancing
journey.
Vested Land Services LLC works hard to get you to the closing table as fast as possible. Our staff will do its best to get you the subordination you need for the closing of your mortgage.
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