How Does a Mortgage Subordination Agreement Work?

First of all, what in the world is a mortgage subordination, and what is a mortgage subordination agreement?

When you have two mortgages on a property, one must be subordinate to, or behind, the other. This all comes down to who gets paid first in the event that the property goes into foreclosure and needs to be sold. Any time there is more than one mortgage on a property, a subordination agreement must be put into place to clarify who will be in what is called “first position.”

Typically, on a home with two mortgages, the more traditional (as in a 15- or 30-year fixed mortgage) will be in first position, then the second mortgage (which could be a home equity loan or line of credit) will be in second.

One lender may carry both the first and second mortgages on a property, but in many cases, a lender may want to limit their exposure on a property by holding only one of the mortgages.

The second mortgage may be taken out at the same time as the first or at some later date. A subordination agreement would also be needed, for example, if you had both a first and a second mortgage and wanted to refinance only the first mortgage.

In this case, the new first mortgage lender would have to create a subordination agreement with the lender of the existing second. Without this, the lender of the second mortgage could move into first position after the original first mortgage is paid off.

So why would any lender want to stand in line behind another? Because second mortgage lenders can charge higher interest rates than first mortgage lenders.

Please let me know if I can answer any additional questions you have about how mortgage subordination and subordination agreements work. I’m always here to help.

What Is a Mortgage Recast and Is There a Benefit?

A mortgage recast is similar to you paying down your mortgage but in a different way. The traditional way to pay down your mortgage is to simply increase the payment you make and tell your lender that you want to apply the excess toward your principal balance.

Doing this will get your mortgage paid off more quickly, but at the same time, the minimum you need to send in each month will be the same as it has always been.

A recast works a little bit differently. Here, you give your lender a set amount of money to pay down the loan. Unlike in the prior example, though, your loan payment will be recalculated downward after the new money has been factored in.

There are both upsides and downsides to doing this. Let’s look at both.

You paying down the loan using a recast would, of course, lower your payment, both for interest and principal each month. This would lower your overall month-to-month obligations, and looking at this for the long term, and you would have much less outlay in terms of principal and interest expense.

The drawbacks are that doing the recast wouldn’t get your loan paid off any faster (though you could still pay it down further) and that the lender will charge you a non-refundable fee to do this.

If you have further questions about how recasts work, I am here, at your service, to answer any and all of them. Please either call or email me.