Homeowners often decide to refinance their first or senior mortgage on their home to take advantage of a low interest rate climate or other attractive loan terms. In this case, the second mortgages on these homes may be paid off, included in the refinance plan or subordinated.
What is subordination?
Subordination refers to a process by which second mortgages continue to remain in second place or as a junior lien when the original first mortgage is replaced / refinanced with a new one. This means that the lender of this mortgage will still come only second in line in case the borrower defaults and the property has to be foreclosed to repay debts.
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Normally, when a home buyer buys a house, he takes a loan to cover the major portion of the home value through a mortgage that becomes the first or senior mortgage. A second mortgage may be taken at a later date either to avoid PMI or to cover other expenses. When the borrower decides to refinance his first mortgage, the second automatically takes its place to become the primary mortgage. This happens because this second loan originated before the most recent once, that is taken to replace the first mortgage.
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The borrower may wish to keep his second mortgage in status quo position as a secondary lien on the house. To do this, he subordinates the second mortgage.
Advantages of Subordination
Borrowers opt for subordination to take advantage of the benefits it offers.
- The second loan remains untouched so that the new first mortgage amount can be a lower amount resulting in smaller debt. When the borrower is refinancing into a cheaper or longer loan because he could not afford the original one, this is very beneficial. By subordinating the second mortgage, the borrower avoids having to pay it off or include that amount in the new refinance loan.
- If the second mortgage is a HELOC, and the entire line of credit has not yet been utilized, subordinating it gives cost savings. The borrower can still continue to use the same loan rather than incur closing costs on it and processing costs on a new one.
Following the many cases of default during the recession, lenders, especially banks, are now very cautious about refinancing housing loans. Your refinance lender may insist that you subordinate your second mortgage. In this case you will have to notify your second mortgage lender and get his acceptance. When you want to opt for subordination for other reasons, it is legally required to be approved by the first lender.
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The process begins with your sending the subordination agreement to the second lender and getting it signed by him. This acceptance has to be passed on to your new first mortgage lender so that the new loan process is completed.
Although it is not a complex process to subordinate second mortgages, it can be time consuming. Eliminate any possible delays by making sure that you intimate your second lender of your intention well in advance. Some lenders may refuse to sign the documents citing depreciation on home value or other reasons. In such cases, you will have ample time to look for a new second mortgage or negotiate with the lender provided you give an advance intimation.
Article Source: http://www.articlesbase.com/mortgage-articles/subordinating-second-mortgages-3554073.html
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For more information on second mortgage or mortgage lenders, contact Canadian Mortgages Inc.