When it comes to taking out a second mortgage on your home, one of the most important things to understand is the subordination policy of second mortgage lenders. This policy can have a big impact on your ability to get a loan and on the terms of that loan. Here’s what you need to know.
What is Subordination?
Subordination refers to the order in which lenders get paid if a borrower defaults on a loan. In general, the lender with the higher priority gets paid first, while the lender with the lower priority gets paid second.
For example, if you have a first mortgage and a second mortgage on your home, and you default on your loans, the first mortgage lender will get paid first. The second mortgage lender will only get paid after the first lender has been fully paid off.
Why Does Subordination Matter?
Subordination matters because it affects the risk that lenders take on when they offer you a loan. If a lender has a lower priority in the event of default, they are taking on more risk. This means that they may charge a higher interest rate or require more collateral to secure the loan.
On the other hand, if a lender has a higher priority, they are taking on less risk. This means that they may offer a lower interest rate or require less collateral to secure the loan.
Subordination and Second Mortgages
When you take out a second mortgage on your home, the lender will typically require that their loan be subordinate to your first mortgage. This means that if you default on your loans, the first mortgage lender will get paid first, and the second mortgage lender will only get paid after the first lender has been fully paid off.
This is important because it affects the terms of your second mortgage loan. Since the second mortgage lender is taking on more risk, they may charge a higher interest rate or require more collateral to secure the loan. They may also place restrictions on how you can use the loan funds, to reduce their risk.
Subordination and Refinancing
If you decide to refinance your first mortgage, it can have an impact on the subordination of your second mortgage. In some cases, the second mortgage lender may agree to subordinate their loan to the new first mortgage. This means that the second mortgage lender is still taking on more risk, but they are willing to do so to keep your business.
In other cases, the second mortgage lender may refuse to subordinate their loan. This can make it difficult or impossible to refinance your first mortgage, since the new lender will not want to take on a lower priority in the event of default.
Subordination and Home Equity Loans
Home equity loans are another type of loan that can be affected by subordination. If you have a home equity loan in addition to your first and second mortgages, the lender will typically require that their loan be subordinate to both the first and the second mortgages.
This means that if you default on your loans, the first mortgage lender will get paid first, followed by the second mortgage lender, and then the home equity lender. The home equity lender is taking on even more risk, since they are the last in line to get paid.
Conclusion
Understanding the subordination policy of second mortgage lenders is key to making informed decisions about your home loans. When you take out a second mortgage or a home equity loan, be sure to ask about the lender’s subordination policy and how it will affect the terms of your loan. And if you are considering refinancing your first mortgage, be aware that it can have an impact on the subordination of your second mortgage, and be prepared to negotiate with your lender accordingly.