Home Mortgage Loans

Subordination of a Second Mortgage


What happens when you refinance and you have a second mortgage? Homeowners often miss an important point about having a second mortgage, home equity loan, or home equity line of credit. 

If you refinance your existing first mortgage, the lender that holds the second mortgage lien must sign a subordination agreement, or the loan must be paid off with your new mortgage.

A subordination agreement basically says that the lender agrees to stay in second lien position on the property title while the new lender assumes the first position. Your refinance loan cannot close until this signed legal document has been received by your lender. It's important that your lender knows upfront that you have a second mortgage, so they can expedite the process. You don't want this condition to delay the funding, especially once your mortgage rate has been locked.

Subordinating a second mortgage can have other issues: The terms of the new first mortgage must be within the second lender's guidelines regarding the maximum combined loan to value, or if there can be negative amortization. Also, in qualifying for your new loan, the second mortgage payment has to be included in the debt ratio calculation, unless the loan is paid off.