Let`s go through the basics of subordination using a home credit line (HELOC) as our main example. Keep in mind that these concepts are still valid if you have a home loan. If you have any questions of subordination, we`d be happy to help. Make an appointment with us today. Subordination is the process of classifying home loans (mortgages or home loans) in significant order. If you have a line. B of home loan, you actually have two loans – your mortgage and HELOC. Both are guaranteed by the warranties in your home at the same time. By subordination, lenders assign these loans a “deposit position.” In general, your mortgage is assigned the first deposit position, while your HELOC becomes the second pledge. Despite its technical name, the subordination agreement has a simple purpose. It assigns your new mortgage to the first deposit position, which allows a refinancing with a home loan or a line of credit.
Signing your contract is a positive step in your refinancing trip. Most subordination agreements are flawless. In fact, you can`t see what`s going on until you`re asked to sign. Other times, delays or fees may surprise you. Here are some important clues about the process of subordination. Unsurprisingly, mortgage lenders do not appreciate the risk associated with a second pledge. A bidding agreement allows them to reallocate your mortgage on the first pledge and your HELOC to the second deposit position. The first right to pledge is always paid first. (In this case, it`s your mortgage.) Equity can only be allocated for the repayment of the second credit if your mortgage is fully paid. If there were a third right of pledge, it would bear fruit under the second right of pledge.
And so on. Refinancing is the process of repaying your old mortgage and replacing it with a better one. If your mortgage is fully paid, the second pledge fee (HELOC) automatically becomes a priority. Your HELOC will be the first pledge, and your new mortgage will become the second pledge. If there is not enough equity to cover what is due to your second pledge, the HELOC lender loses money. Subordination cannot magically repay loans, but it helps lenders estimate risk and set reasonable interest rates. In case of forced execution, your mortgage and HELOC must be paid with the equity of your home. Unfortunately, the equity of a home cannot always cover the full costs of the two loans. Subordination solves this problem with predefined pawn positions.