If you want to refinance your first mortgage and have other liens or mortgages on your home, you might need one or more subordination agreements to adjust the lien priority. Generally, lien priority is determined by the date a mortgage or other lien is recorded in the county land records. Though, some liens, like property tax liens, have automatic superiority over essentially all prior liens.
When more than one lien is on a property, the liens' priority determines the order in which they'll be paid if the property is sold in a foreclosure sale. Again, like most other liens, mortgage liens have different priorities based on their recording date. A first-mortgage (one that you take out first that's recorded first in the county land records office) is given higher priority than a second-mortgage lien and will be paid first. A lien that's recorded second has second priority and will be paid next, and so forth. A limited amount of money is available after a foreclosure sale. If a lien is low in priority, it's less likely to be paid following a foreclosure.
So, the purpose of a subordination agreement is to adjust the new loan's priority so that in the event of a foreclosure, that lien gets paid off first. In a subordination agreement, a prior lienholder agrees that its lien will be subordinate (junior) to a subsequently recorded lien.
Because conventional first-mortgage lenders won't agree to refinance a loan unless they're guaranteed first position, the only way that refinancing transactions work is when the second-mortgage holder agrees to subordinate. A subordination agreement allows the new lender to move into first position.
Junior lienholders won't automatically agree to be subordinate to a new first mortgage but will generally consent if the home's equity is sufficient to cover both loans. So, subordination agreements are a relatively common practice in the lending industry.
Let’s say you want to refinance your primary mortgage, which is in the amount of $300,000 with 6.5% interest, to get a lower interest rate. You also have a Home Equity Line of Credit second mortgage (a HELOC) on the property for $50,000. Your house is worth $400,000. When you refinance the first mortgage, you're paying it off with a new loan. The second mortgage (the HELOC) would then move into first position because it would be the oldest mortgage still recorded on the property. The refinancing lender, who's providing $300,000, requires that its loan be in first position. So, it asks the HELOC lender to subordinate and that lender agrees because the home has enough equity to cover both loans. By signing the subordination agreement, the HELOC lender agrees to give up its lien priority in favor of the new lender, even though the HELOC lien was recorded before the refinancing.
Generally, the refinancing lender will handle the task of obtaining any necessary subordination agreements. Sometimes, though, the borrower is assigned this chore. If you need a subordination agreement from a second mortgage holder, contact that entity. Explain that you're refinancing your first mortgage and that the new lender wants a subordination agreement.
If the second mortgage holder won't sign the agreement, consider hiring a real estate attorney to help you through the process. If you have questions about lien priority in a foreclosure, contact a foreclosure attorney.