What Is a Subordinate Mortgage?

Subordinate Mortgage: The Basics

A subordinate mortgage is any mortgage that holds a lower priority than the first, or primary, mortgage on a property. The term "subordinate" simply means secondary in ranking. In the mortgage world, this ranking is called lien position, and it determines the order in which lenders get paid if the property is sold or if the borrower defaults.

The most common example of a subordinate mortgage is a second mortgage. If you buy a home with a primary mortgage and later take out a home equity loan or a home equity line of credit (HELOC), that second loan is subordinate to the first. The first mortgage lender has the senior lien, and the second mortgage lender has the junior, or subordinate, lien.

How Lien Position Works

Lien position is determined by the order in which mortgages are recorded with the county or registry of deeds. The first mortgage recorded holds the first lien position, the second recorded holds the second position, and so on. This matters because in a foreclosure or short sale, the senior lienholder gets paid first from the sale proceeds.

Consider this example: you own a home worth $400,000. You have a first mortgage with a balance of $300,000 and a second mortgage with a balance of $50,000. If the home is sold through foreclosure for $320,000, the first mortgage lender receives their full $300,000, the second mortgage lender receives only $20,000 of their $50,000 balance, and any remaining junior lienholders receive nothing.

Because subordinate lenders take on more risk, they typically charge higher interest rates than first mortgage lenders. The further down the priority chain a lien sits, the more risk the lender carries and the more expensive the loan tends to be for the borrower.

Types of Subordinate Mortgages

Home Equity Loans

A home equity loan provides a lump sum of money secured by your property. It is a fixed-rate, fixed-term loan that sits behind your first mortgage. Borrowers commonly use home equity loans for major expenses like home renovations, debt consolidation, or education costs.

Home Equity Lines of Credit (HELOCs)

A HELOC functions like a credit card secured by your home. It provides a revolving line of credit that you can draw from during a set period, typically 10 years, followed by a repayment period. HELOCs usually have variable interest rates and also sit in a subordinate lien position.

Piggyback Loans

Sometimes called an 80-10-10 or 80-15-5, a piggyback loan is a second mortgage taken out simultaneously with the first mortgage at the time of purchase. The purpose is usually to avoid private mortgage insurance (PMI) on a conventional loan by keeping the first mortgage at or below 80% loan-to-value while covering part of the remaining down payment with the subordinate loan.

What Is a Subordination Agreement?

A subordination agreement is a legal document that changes the priority of liens on a property. This comes into play most often when a homeowner wants to refinance their first mortgage while keeping a second mortgage in place.

Here is why it matters: when you refinance your first mortgage, the original first mortgage is paid off and a new mortgage is recorded. By default, that new mortgage would be recorded after the existing second mortgage, which means the second mortgage would move up to the first lien position and the new refinanced loan would become subordinate. That is backwards from what anyone intended.

To fix this, the new first mortgage lender requires the second mortgage lender to sign a subordination agreement. This agreement says the second mortgage lender agrees to remain in the junior position, allowing the new first mortgage to take priority. Without this agreement, the refinance cannot proceed.

Subordination agreements can take anywhere from two to six weeks to process, and they are one of the most common causes of delays in refinance transactions. If you are planning to refinance and have a second mortgage or HELOC, discuss the subordination timeline with your loan officer early in the process.

When Are Subordinate Mortgages Used?

• Avoiding PMI: Using a piggyback loan to keep the first mortgage at 80% LTV
• Tapping home equity: Accessing the equity in your home without disturbing your existing first mortgage rate
• Down payment assistance: Some down payment assistance programs are structured as subordinate liens that may be forgiven over time
• Home improvements: Financing renovations through a second mortgage or HELOC rather than a cash-out refinance
• Bridge financing: Using a bridge loan in a subordinate position to fund a purchase before selling a current home

Risks and Considerations

Taking on a subordinate mortgage increases your total debt and your monthly payment obligations. Before adding a second lien to your property, consider whether the purpose justifies the cost. Second mortgages and HELOCs carry higher rates than first mortgages, and your home is the collateral. If you cannot make payments on any mortgage secured by your property, you risk foreclosure.

It is also worth understanding how a subordinate mortgage affects your ability to refinance in the future. As mentioned above, you will need a subordination agreement from the junior lienholder, and not all lenders are willing to subordinate in every situation. If your combined loan-to-value ratio is too high, the second mortgage lender may refuse.

If you are considering a home equity loan, HELOC, or any form of second mortgage, it is worth discussing your options with a lender who can look at your full financial picture. In many cases, a cash-out refinance on your first mortgage might be a simpler and more cost-effective alternative.