Second Mortgages are Subordinate to the First
March 30th, 2011
March 30th, 2011
A term that is not commonly known, but often taken into consideration when discussing debt, is subordinate. When you have a first, or original, mortgage and also a second mortgage, what happens when you want to sell your house, refinance or cannot make your payments? What is the 'pecking order' of importance, or are they the same?
Investopedia provides this definition: A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known as a "junior security" or "subordinated loan".
They further explain that in the case of a defaulted debt, creditors with subordinated debt wouldn't get paid out until after the senior debtholders were paid in full. Therefore, subordinated debt is more risky than unsubordinated debt.
So why do you need to know this? A second mortgage is an example of subordinated debt. If you have a second mortgage, this loan is subordinate to the original mortgage. Therefore, the first mortgage has a higher priority over your other mortgage debt(s) and will be paid first if you default on your loans.
This makes sense, but it can have some negative implications if you want to refinance. The originator of the second mortgage has some say regarding what happens to your loan if you want to refinance. Because subordinate loans often have tougher requirements and restrictions (and higher interest rates), the lender can deny a request for refinance, even if your primary (or first) mortgage holder has agreed.
This decision can actually impede your desire to refinance your mortgage, even when you prove that this process would reduce your monthly debt and allow you to pay the loan off sooner.
This scenario proves the importance of working with a knowledgeable mortgage broker whether you're looking for a first mortgage, second mortgage or a refinance to merge the two.
My next post will provide a Case Study that involved a subordinate loan. You will meet a local couple who faced the issue of their second mortgage lender not 'permitting' a refinance, and how Grandview Lending was able to assist them.
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