Lenders consider the worst-case scenario when refinancing a home with two mortgages. They want to recoup their money in case you end up in foreclosure. Therefore, first and second mortgage lenders may vie for senior, or first, lien position to minimize losses. If you refinance a first mortgage, you usually must pay off or subordinate an existing second mortgage. Resubordination of a second mortgage ensures that the new first mortgage takes precedence for future payoff. Because second mortgages can be wiped out in a foreclosure, you must convince your second lender to accept this tenuous position via a subordination agreement.
Consult your current lender or a new lender about a potential refinance. A mortgage professional analyzes your loan scenario, determines whether you can refinance the first mortgage and establishes the best way to present the refinance to your second mortgage lender so it agrees to resubordinate. Lenders that agree to subordinate include lenders of second mortgages, home equity loans and home equity lines of credit, or HELOCs. Unless you have substantial equity and your risk of foreclosure is minimal, second lenders prefer that you pay off your debt through the refinance.
Contact your second mortgage lender to request the subordination agreement for the refinance lender. Some first mortgage lenders help with this part of the process. Otherwise, explain to the lender that refinancing your first mortgage and subordination serves its best interests. It's more likely to subordinate a second mortgage if the refinance results in a lower monthly payment or otherwise better repayment terms, as this decreases the risk of foreclosure.
Send the second lender the official subordination request via fax, email or regular mail. Also, send the appraisal from the refinance transaction. The second lender may also order a full appraisal of your property -- which you pay for -- to determine whether it can subordinate the mortgage. It may take several weeks for the second lender to process this paperwork and send the subordination agreement to you or the refinance lender.
Tips & Warnings
- Second mortgage lenders generally agree to subordinate when there is sufficient value in the property to cover both first and second loan payoff.
- Second mortgage lenders are unlikely to subordinate in a cash-out refinance, in which you tap into your home's equity and receive cash back from the first lender at closing.
- Because your refinance depends on your second lender's response, ask the second lender for an estimated turnaround time for the subordination agreement. Schedule your refinance closing accordingly to prevent delays and rate-lock expiration.
- Appraisal fees are non-refundable, even if the second lender doesn't agree to subordinate.
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