Mortgage Subordination - An Option When Refinancing
In recent years it was common practice to take out an 80/20 mortgage, meaning a first mortgage for 80% of the home's value and a second mortgage or home equity line for the remaining 20%. It was a way to obtain 100% financing without the private mortgage insurance required on most 100% loan programs. You may be interested in refinancing your first mortgage to take advantage of a lower rate or to convert an adjustable rate loan to a fixed, but what to do with that second mortgage?
You have two choices:
- Pay off the second mortgage with the new loan. If you have enough equity in the home either because you have paid down the balance on your loans, or because the property has appreciated over time, you may be able to take out a new first mortgage large enough to pay off both your existing first and second loans.
- Subordinate the second mortgage. You often have the option to keep your second mortgage and refinance only your first mortgage.
What is a subordination in a mortgage refinance?
Mortgage subordination involves having the lender who holds the second mortgage agree to take the second lien position to the new first mortgage. Lien position means the order in which the debts will be satisfied in the event there is a default (the borrower stops making the mortgage payments) and the property goes into foreclosure. In general the hierarchy of lien position is based on when the loans were taken out, but a lender will not ordinarily agree to refinance a first mortgage unless they will be the first lien holder. Most often second mortgage lenders will agree to the subordination of their mortgage loan and provide a subordination agreement.
It is important to understand that while most second mortgage lenders will provide subordination agreements it can sometimes take some time to receive them. If you are anxious for your mortgage refinance to be processed quickly you may want to find out from your second mortgage lender how long it will take them to provide a subordination agreement before you decide whether to pay off the loan as part of your refinance.
Because second mortgages are less likely to be repaid in the event of a foreclosure or short sale some lenders are no longer offering mortgage subordinations. To learn more contact American Financial Resources at 800-316-9508. Our loan consultants are true financial experts and can help you understand nuances in the mortgage process such as this one, and how it will play into your transaction. If you don't have time to talk right now, simply submit a quote request or get started online and we will get in touch with you when it's convenient. We look forward to working with you.
Last Updated: April 12th, 2010 1:42 PM CDT