[kiawah]

There is a lot of information on the web regarding A Loan/Mortgage subordination agreement, however, there aren't any examples. Can you give me an example of a loan subordination. First Mortgage is 214, 000 6.375 Interest only ARM. Second Mortgage is 69,000 9.94 30 year fixed. Current Property Value is 230,000. Can you explain what a loan subordination will do for me?

[LisaB4657]

A loan subordination is necessary when you have 2 mortgages and you want to refinance the first one. Without a subordination, if you refinance the first one then the second one automatically becomes the first in priority, and the refinanced first automatically becomes the second in priority. (The priorities are created by the dates of signing and recording the loans.) But the lender who is holding your note for the greater amount always wants to be first in priority so they will require that the lender of your second loan execute a subordination agreement. That agreement says that the second lender agrees to remain second in priority to the first lender after a refinance of the first loan.

Here's an example: You have a $214,000 first mortgage with Citibank. You have a $69,000 second mortgage with Bill's Loans. You want to refinance with Citibank but if you do, Citibank will become second in priority and Bill will become first. Citibank doesn't want that so they require that Bill signs a subordination agreement. Bill signs it because he doesn't want you to add the 69K to your 214K and refinance with Citibank for $283K and pay him off completely because he's collecting a very nice interest rate from you. He signs the subordination agreement and it gets recorded along with the new Citibank mortgage when the refinance of your first mortgage is completed.

[kiawah]

Ohhhhhhhh, OK. So, the refianced loan amount of 230, 000 (Value of the House) will apply to the first mortgage. So my new first mortgage will be 230, 000 instead of 214,000 and my second mortgage would remain the same. If this is true, How does this benefit me other than getting a better interest rate?

[LisaB4657]

A subordination doesn't benefit you, it benefits your first lender. If you don't get them a subordination from the second lender then they won't refinance you.

The benefits to you are a lower interest rate on your first mortgage plus an additional $16,000 in your pocket. However, once your second lender sees the amount of your proposed first mortgage they may not agree to subordinate, since the amount of the new first loan will eat up all of the current value of the property and create more risk for them. There's a very good chance that they may not be willing to accept more risk.

Plus, do you really want to owe $299K on a house that's only worth $230K?

[kiawah]

Right. Thanks so much. This was extremely helpful. I appreciate the detailed and quick responses. You saved me from possibly being dooped into paying a non-refundable subordination and appraisal fee.

[LisaB4657]

My pleasure. Good luck!