Subordination Clause

The clause inserted into a mortgage document that keeps the mortgage secondary to any other mortgages. Loans are valued according to the chronological order on which they are put onto a property. In the event of foreclosure, all the money from the sale goes to pay off the lender of the first mortgage. What ever money is left over goes to pay off the holder of the second, third, or fourth mortgages. When a first mortgage is paid off, the second one advances to the first spot. This could prevent a homeowner from refinancing. Hence a subordination clause is inserted in the second mortgage so that in remains in second position.

Why would a second position lender agree to a subordination clause? It's simple - because the lender is making a profit off of your loan and would prefer to keep making money on you rather than giving up the loan to a new larger First Mortgage. As long as you are not putting the second mortgage holder into a significantly riskier position they will normally always agree to subordinate.

You will really only need a subordination agreement if you have a first and second mortgage
and you want to refinance your first mortgage only without touching the second.

Many second mortgage lien holders will not subordinate to a loan that may have negative ammortization such as an Option Arm or Pick A Payment loan.

Lenders do not have to subordinate.

During refinancing some lenders do not allow subordination claueses. Before refinancing make sure the lender does allow for this.

Second mortgages are most commonly found in piggy back loans:

80/20 (100% financing)
80/15/5 (5% down payment)
80/10/10 (10% down payment)

The rates on second mortgages are usually higher than the first lien.