How To Subordinate A Home Equity Loan

[May 5, 2009.]

 

Why Subordinate a Home Equity Loan?
As many individuals are looking to save money in this economy, the currently low mortgage interest rates have attracted many homeowners to the possibility of a refinance. Unfortunately, many homeowners will eventually discover a serious obstacle because of their existing home equity loan. Specifically, a lender's subordination clause could hinder a refinance if the home equity loan must move up in lien position.

In most cases, existing home equity loans are almost always in second lien position. When a homeowner wishes to refinance their first lien mortgage only, they must subordinate an existing home equity loan to stay in second lien position. Otherwise, the home equity loan will move up to first lien position. If that becomes the case, not many lenders will fund a main home loan in second lien position behind a home equity loan.

The Importance of Mortgage Lien Positions
From the mortgage lenders point of view, mortgage lien positions are absolutely critical to profitability and risk assessment. Especially since home equity levels have dropped nationwide, mortgage lenders now have less incentive to agree to a subordination clause. As your home equity decreases, the lender's security and collateral decrease as well. Additionally, homeowners with bad credit may find it more difficult to subordinate an existing home loan. Although not as common, these lenders may be looking to get off the hook of dealing with a borrower with bad credit.

From a homeowners perspective, home equity loan subordination clauses determine how, and if, you can refinance. As mentioned, if a home equity loan lender will not budge, you'll be forced to refinance both loans or put off the refinance altogether.

To get around a lender who won't subordinate their mortgage, homeowners have a couple of options available. Individuals can talk with the new lender and see if they will also fund a home equity loan or home equity line of credit. If they are willing, homeowners can refinance into a new mortgage and home equity loan at the same time. Another option is to refinance your first mortgage with the lender who holds your home equity loan. Although they may not want to subordinate to another lender, they may be willing to subordinate the loan if you take out a home loan with them instead

Finding The Right Home Equity Loan
To avoid the headaches and hassles of home equity subordinations, find the right mortgage professional as early as you can. In fact, if you're in the process of mortgage shopping, take the hint and make sure you find a home equity loan with a favorable subordination clause. Additionally, working with the right mortgage professional can help you through the refinance process and extra work necessary to subordinate a home equity loan. To find a local mortgage broker or lender in your area, visit our site's resource directory for a professional specializing in home equity loans.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.