Subordination Clause

Refinancing is the option used by many homeowners for lowering interest rates but if you have a home equity loan, the mortgage lender may ask for a subordination clause to refinance, which means, the contract establishes that one of your debts is higher in priority as compared to other debts.

It indicates the lender has a lien against the property and if you fail to make payments on time, the lender has rights to your property and this also lowers the risk to your mortgage provider. 

Such platform home loan options help the lender at the time of foreclosure, where they are first in line to claim the payments which mean, the other loans may fall in a subordinate position. 

The IRS has the power to decide if other loans are subordinate to the new ones, and if they are unable to agree, the refinancing may not happen.  

In the condition of foreclosure, the regulators will not give the second-ranking lender the dues first. They will be paid only in case the sale proceeds and the primary loan payment does not exceed the balance.

The second loan may be offered by a financial institution at a higher rate of interest to reflect the higher level of risk.