What is subordination?
An online dictionary defines this as “to make subject or subservient, or to treat as of less value or importance.” Let’s take your situation: your home is worth $400,000, and you have a first trust (mortgage) in the amount of $150,000, and a HELOC in the amount of $100,000. It should be noted that the HELOC is a second trust, which is recorded among the land records in jurisdiction where your property is located. You want to refinance the first trust, but keep the second in place. Your new lender wants to be in first trust position, so that should you become delinquent on your loan payments, that lender will be able to foreclose and be first in line to get the sales proceeds. When you refinance, the moneys from the new lender will be used to pay off the original first mortgage. That means that your HELOC — which was in second position — will automatically become first in line. Accordingly, you were asked to enter into a “subordination agreement” whereby you — and the HELOC lender —
When a borrower refinances their 1st lien mortgage loan a new mortgage is created. The first mortgage company asks junior lien holders to remain in a subordinate position so that when the new mortgage is recorded it remains in first lien position. By executing a Subordination Agreement, a junior lien holder agrees to stay in a lower lien position (for example, a second lien).
