What is a Subordination Request?

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A quick Google search will give plenty of information on the definition of subordinate but what exactly does it mean to subordinate a mortgage?

sub·or·di·nate

adjective /səˈbôrdnit/

  • Lower in rank or position
    • – his subordinate officers
  • Of less or secondary importance
    • – in adventure stories, character must be subordinate to action

noun /səˈbôrdnit/   subordinates, plural

  • A person under the authority or control of another within an organization

verb /-ˌāt/   subordinated, past participle; subordinated, past tense; subordinates, 3rd person singular present; subordinating, present participle

  • Treat or regard as of lesser importance than something else
    • – practical considerations were subordinated to political expediency
  • Make subservient to or dependent on something else

Subordination is the process by which a creditor is placed in a lower priority for the collection of its debt from its debtor’s assets than the priority the creditor previously had.  The debt is said to be subordinated but in reality, it is the right of the creditor to collect the debt that has been reduced in priority. The priority of right to collect the debt is important when a debtor owes more than one creditor but has assets of insufficient value to pay them all in full at the event of default.

In real estate specifically, claims against a property are assessed by the date of the lien and the date said lien was recorded.  Typically speaking, the first mortgage is given and recorded at the time of purchase.  This may or may not be the only loan taken out on a property but it is the first one recorded and usually the largest.  Some people obtain first and second mortgages at the time of purchase, some obtain a second mortgage after purchase (either an equity line or an equity loan), and others purchase with first and second mortgages and later obtain equity lines which would give way to the property having first, second, and third mortgages.

When people go to refinance their first mortgage but opt to leave an equity line of credit open, the equity line must be subordinated to allow the new loan to be in first place in the chain of debtors.

Why subordinate an equity line and not just pay off the balance with the new mortgage?  There are several reasons someone would want to leave their equity line open:

  1. An equity line of credit is an open line of credit secured by the equity in a piece of real property.  It is a handy thing to have around when it comes time to buy a new car, use as overdraft protection on a checking account, pay for unexpected household expenses, pay for home renovations, etc.  Since the equity line is viewed as a mortgage this makes any interest paid on the equity line itemizable on your income tax returns.  You cannot write off the interest on a car loan to Ford Motor Credit but you can write off the interest on a Wells Fargo home equity line of credit.
  2. If you are one of the lucky ones that get annual bonuses you may opt to use your equity line for an expense and plan to use the bonus to pay off the expense at the end of the year.  If you refinance into one big mortgage and make a $20,000 principal payment you will not see the benefit until many years down the line when you pay off your mortgage early.  Your monthly payment on a 30-year fixed rate mortgage will not change, where as your equity line of credit payment will.
  3. Seasonal income / Commission income earners frequently enjoy the security of having an equity line that can be paid off when commissions arrive. This is much more attractive than relying on credit cards, as not only is the interest tax deductible, the interest rate is usually ten (10) or more percentage points lower.

3 Comments

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  1. M, these are very sane uses for a HELOC.

    Used in this way, a HELOC is like a credit card that lets you write off the interest at tax time instead of giving the interest away to a bank. And you’re not paying it down for 30 years – if you’re smart you pay it down fast and don’t abuse it.

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