Subordination

It is possible for a private or commercial lien to cut in line, ahead of existing liens on the property. The method used to accomplish this lien reshuffling is the "subordination" agreement.

A new lien can take a primary position—ahead of existing liens on the subject property—if those existing liens accept and sign a subordination agreement. With a subordination agreement, an existing lien "subordinates" itself to the new lien. Subordination agreements are sometimes used with refinances.

For example, consider the case of the Zena who has both a first and second mortgage on her home. She wants to refinance only the first mortgage, but leave alone the second mortgage home equity loan. Her first mortgage refinance is approved, but a subordination agreement is required.

Remember that a first mortgage loan must take a first mortgage lien position. Chronologically, the refinance would come after the current second mortgage home equity loan Zena already has on the property. So she contacts her second mortgage lender. and they agree to the subordination agreement (after reviewing her refinance terms).

At the closing, the new refinance loan assumes first mortgage lien, while the current second mortgage "subordinates" itself to the new first mortgage loan.

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