Subordination Agreements

Many homeowners refinancing today have a 1st and 2nd mortgage on their home. For instance, their housing value is $300,000 and they have a 1st mortgage of $200,000 with a 6.5% interest rate and a HELOC (2nd mortgage) of $50,000 at 3%. And you know how HELOC interest rates are now, right? Low, low, low! The homeowner is trying to seal the deal to refinance the $200,000 at 4.75%. Of course, any sane individual would want to keep the 3% HELOC. (Keep in mind the HELOC has a variable interest rate. A year from now it could shoot up to God knows what!) But that sneaky little HELOC is in a very powerful position. If you try to refinance the 1st mortgage the HELOC must sign off on a Subordination Agreement.

So what you say? The Subordination Agreement means the HELOC will not take first lien position after the refinance and it will remain in second lien position. So what you say, again? Let's say that our homeowner slips into the abyss of foreclosure. The first and second mortgage would have to be paid off if the home is sold at auction. But, let's say the home auctioned off for $215,000. When it's auctioned, the mortgage in first lien position gets paid off first. In this case, the $200,000 mortgage is paid, but there's only $15,000 left over to pay the $50,000 HELOC. Of course, the HELOC gets upset because it's short $35,000! That's the risk of being in second lien position.

If the homeowner wants to refinance and the HELOC does not sign off on the Subordination Agreement, the HELOC would get paid off first in case the homeowner slips into foreclosure. You know what that means? It's almost impossible to refinance the first mortgage without the Subordination Agreement signed off by the HELOC. The mortgage company refinancing the first mortgage would almost never put itself in the position of being in second lien position behind the HELOC in first position. In this case it's purely a matter of who gets paid off first if the stuff hits the fan.

So, what am I saying? Although there's a refinance boom right now because of low interest rates, the process is not a slam dunk. In our scenario, if the HELOC does not sign off on the Subordination Agreement, the homeowner may have no choice but to refinance both mortgages, which could present another problem if the homeowner didn't get the 1st mortgage and the HELOC at the same time. Oh well, I'll save that discussion for next time...

Give me a buzz if you're in need of a mortgage...or just a friend in need!

Kirk Charles, 973-919-8065, kirkcharles@comcast.net