What happens when you refinance and you have a second mortgage? Homeowners often miss this important point about having a second mortgage, home equity loan, or home equity line of credit.
If you refinance your existing first mortgage, the lender that holds the second mortgage lien must sign a subordination agreement, or this second loan must be paid off with your new mortgage.
A subordination agreement basically says that the lender agrees to stay in second lien position on the property’s title while the new lender assumes the first position. Your refinance loan cannot close until this signed legal document has been received by your lender. It’s important that your lender know upfront that you have a second mortgage so they can expedited the process. You don’t want this condition to delay funding especially once your mortgage rate has been locked!
Subordinating a second mortgage can have other issues, requirements and guidelines which vary from lender to lender. There is a fee for the subordination of second loans which also varies from lender to lender.