If you have two mortgages on your property, such as a first mortgage and a HELOC, you may have to deal with a mortgage subordination. By default, your second mortgage, HELOC or not, comes in second place in terms of ranking. If you default on your mortgage, meaning you stop making payments, the first bank that receives payment is the first lienholder. The second mortgage holder always comes second. This is why second mortgages often have higher interest rates. Lenders make up for the risk of being left with nothing by charging more interest.
How you are Affected
Holding two mortgages will not affect you in any way, with the exception that you need to make payments on two mortgages. It also takes away the equity in your home. As you pay down the balances of your mortgages, you gain more equity. You can expect the subordination to affect you when you try to refinance, though. This is when the second lienholder must agree to subordinate again. Generally, since the second mortgage already holds second position, there is not a problem. But you should know how the process works to make sure you have your bases covered.
How a Mortgage Subordination Works in a Refinance
Let’s say you decide the time is right for a refinance. You have a first and second mortgage on the home. You are only refinancing the first mortgage. At the closing, the new lender pays off your first mortgage. By default, the second mortgage slides into first position. However, you have a new first mortgage that will take the place of the original mortgage. Without a mortgage subordination agreement, this would not be the case. The second mortgage would become the first and the new mortgage would take second positon. This does not sit well with most lenders. This is why you have to secure a subordination agreement before you can close on the new mortgage.
Obtaining the Subordination Agreement
Typically, your new lender will assist you in obtaining the subordination agreement. In the event that they do not, you can take over the process yourself. Allow yourself plenty of time as some lenders take several weeks to complete the project. There is no proper procedure or way to go about it. You simply need to call your second lienholder and explain that you plan on refinancing your first mortgage. Because the second mortgage will have an earlier recording date than the new first mortgage, it would automatically take first position. Let the lender know the new mortgage holder will not allow the refinance unless the second loan remains in second position.
What you Need
Every bank differs in their requirements for the subordination agreement. Typically, they request the following though:
- Appraisal on the property – This enables them to determine that there is enough equity in the home to handle both mortgages
- Terms of the new loan – The second lienholder needs to make sure there are no out of the ordinary terms on the new loan that would affect them
- Closing date – This gives the second lienholder an idea of how long they have to evaluate the situation and decide if they will agree to the subordination
Mortgage subordination is not a bad thing. In fact, it is what every second mortgage holder already does. It does add a little more work to the process when you wish to refinance, but it is manageable. As long as you let the lender know up front that you need to subordinate, thy usually work with you. The earlier you start the process, though, the better off you will be in the long run.