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Mortgage Subordination Explained

Sarah Sharkey3-minute read

November 23, 2022


As you dive into homeownership, you’ll run into dozens of terms that you’ve never encountered before. One of these terms is mortgage subordination.

You can likely guess that understanding mortgage subordination is important. But what exactly does it mean? Let’s take a closer look at the ins and outs of mortgage subordination.

What Is Mortgage Subordination?

Subordination itself is the act of placing something in a lower-ranking position.

Mortgage subordination boils down to a ranking system on the liens secured by your home. A lien is a legal agreement that grants the lender a right to repossess the property if you default on the loan. The order of subordination is determined based on the type of loan against your property.

If you only have one home mortgage and no other liens, you’ll find that mortgage subordination comes into play when you have more than one outstanding lien on your home. But the importance of mortgage subordination will really only reveal itself if you were to default on the loan.

Let’s say a borrower finds themselves in financially dire straits and defaults on their mortgage. At that point, the loan which has a primary position will be paid off first. After that, the subordinate loans will be taken care of with any funds that are left over from the primary mortgage.

Understanding Subordination Clauses

When you take out a mortgage loan, the lender will likely include a subordination clause. Within this clause, the lender essentially states that their lien will take precedence over any other liens placed on the house.

A subordination clause serves to protect the lender in case you default. If a default happens, the lender would have the legal standing to repossess the home and cover their loan’s outstanding balance first.

If there are other subordinate mortgages involved, the secondary liens will take the backseat in this process. With that, the subordinate liens would only have the chance to recoup their costs after the primary lender has been taken care of.

In some cases, the value of the home won’t be enough to cover all of the liens. With that, subordinate lenders are in a riskier financial position than the primary mortgage.

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What Mortgage Subordination Means For Borrowers

So, now you know what a subordinate mortgage is. But how does this affect you?

At first glance, it might seem like this clause is only important to the lender. But a mortgage subordination clause can have other impacts on your finances. Here’s what to watch out for.

Refinancing Your Home

If you want to take advantage of lower interest rates by refinancing a mortgage, mortgage subordination clauses could present a roadblock.

Let’s say you already have two mortgages and you want to refinance the primary loan. In the process of refinancing, the original subordinate loan would become the primary loan since the original primary loan will no longer exist.

With that, many lenders will not approve this refinance because they would be a subordinate loan. Sometimes, the refinance can move forward if the original subordinate loan agrees to a new subordinate clause. However, it might not always work out.

One way around this is to refinance both loans into a single mortgage that doesn’t have any subordinate clause issues.

Getting A Second Mortgage

A second mortgage will become a subordinate loan. If you repay the primary loan within the term of the second mortgage, then the second mortgage can take its place as the primary loan.

As a second mortgage, the lender will be taking on more risk. With that, you can expect higher interest rates and less attractive terms.

The Bottom Line

Mortgage subordination is a regular occurrence in the lending industry. With that, you will likely run into this clause at some point in your homeownership journey. As the borrower, mortgage subordination won’t necessarily affect you unless you plan to put additional liens on the property.

Not sure if the mortgage subordination clause in your loan is a good one? Speak with a Home Loan Expert to discuss the details of your unique situation.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make savvy financial decisions. She’s covered mortgages, money management, insurance, budgeting, and more. She lives in Florida with her husband and dog. When she's not writing, she's outside exploring the coast. You can connect with her on LinkedIn.