Subordination of a Second Mortgage
Mortgage lenders loan money based on their security interest in a home. If there is more than one mortgage on a home, the interests of one lender must come before the other. This can cause confusion when a home is sold or foreclosed upon, so there must be a written statement of which mortgage comes first. This act of officially placing one mortgage in "second" position is called subordination.
Other People Are Reading
-
Primary and Subordinate Mortgages
-
The role of the primary mortgage is important because the primary mortgage is the one that is paid first. When there are two mortgages on a home, if a home sells for less than the principal balance of both loans, the primary loan is paid off first. The subordinate loan, which is in second position, receives the balance of the sale proceeds. This can mean that the subordinated mortgage may get significantly less than the principal balance of the loan, particularly if the house sells for dramatically less than what is owed on it.
Subordinate Second Mortgages
-
When there is already a larger first mortgage on a home, the smaller second mortgage is usually automatically subordinate to the first mortgage. This is true whether the first and second mortgage are closed at the same time --- as is the case with a "piggyback" mortgage --- or a home equity loan is taken out on a home with only one mortgage currently on it. This is why lenders are selective about issuing second mortgages when the value of both mortgages together will equal 100 percent of the market value of a home as determined by a current appraisal. Second mortgage lenders like to leave some cushion with the value of a home to increase the likelihood they will get all of their money.
-
Role of Mortgage Insurance
-
Homeowners who take out a single mortgage for more than 80 percent of the value of a home are required to get mortgage insurance. Those who have first mortgages that are for 80 percent of the value of the home or less do not have to get mortgage insurance. Mortgage insurance is a policy the homeowner pays for as part of his monthly mortgage payment that insures the lender for any loss it incurs from the sale of the home in foreclosure and reimburses the lender for any shortfall between the sale price of a home and the principal loan balance. Since second mortgages are nearly always for less than 80 percent of the home's value, second mortgage lenders cannot get mortgage insurance for their loans and must shoulder any losses incurred from a loan default.
Refinance
-
If a homeowner refinances his primary mortgage, but does not refinance his second mortgage, the second mortgage automatically bumps up to the primary position. The new first mortgage lender must ask the second mortgage holder to agree to take the subordinate position. The secondary lender can refuse to do this and likely scuttle the deal. The only alternative is for the new first lender to pay off both the old first and second mortgages with the new loan. This can cause the homeowner to have to pay mortgage insurance or possibly pay a higher interest rate, depending on the terms of the original second mortgage.
-
