Why subordination matters when you refinance

When you refinance a mortgage, the new lender expects to be the first lien on the property so it has priority for repayment if the borrower defaults. Subordination is the legal process that lets an existing junior lien (for example, a home equity loan or HELOC) stay in place behind the new first mortgage instead of blocking the refinance or being paid off. Without a subordination agreement, the new lender may require that junior liens be paid off or the refinance may be denied entirely.

This matters because many homeowners use second mortgages and HELOCs to access cash. When interest rates fall or when borrowers want better terms, refinancing the first mortgage often makes financial sense — but only if lien priority is resolved first. The Consumer Financial Protection Bureau explains how multiple liens affect mortgage transactions and why lenders care about lien priority (Consumer Financial Protection Bureau: https://www.consumerfinance.gov).

In my practice working with homeowners and investors, failing to identify and address junior liens early in the refinance process is the single biggest cause of delays or denied loan applications.

How subordination works — step-by-step

  1. Application and title search: The refinance lender orders a title search. The search shows all recorded liens and their priority. Common junior liens include second mortgages and HELOCs.

  2. Lender requirement: The new lender decides whether it requires first lien position. Most conventional, FHA and VA lenders will insist on being first lienholders unless the loan program allows exceptions.

  3. Request for subordination: If a junior lien exists and the borrower wants it to remain, the borrower (or the new lender) requests a subordination agreement from the junior lienholder.

  4. Junior lienholder review: The junior lender reviews the refinance terms, borrower credit, loan-to-value (LTV) after refinance, and sometimes charges a processing fee. If the junior lender agrees, it signs a formal subordination agreement that is recorded with the county.

  5. Title insurance and recording: The title company issues policies and endorsements showing the new first mortgage position. The recorded subordination agreement preserves the junior lien’s existence but places it behind the new mortgage in priority.

If the junior lienholder refuses, the borrower’s options usually are to pay off the junior lien as part of the refinance, to include the junior loan in a cash-out refinance (if eligibility allows), or to shop for a lender willing to accept the existing priority. Some lenders will not permit open HELOCs in front of their loan and may require them closed or paid.

Common scenarios that require subordination

  • A homeowner with a first mortgage and a HELOC wants to refinance the first mortgage to a lower rate while keeping the HELOC open for future use.
  • An investor has multiple loans across properties and needs the first-lien status for a new refinance to lower rates and improve cash flow.
  • A borrower attempts a cash-out refinance and the title search shows junior liens that must either be paid off or subordinated.

If you use a HELOC, read our in-depth comparisons and rules about using HELOCs with refinancing in the article “Home Equity Loan vs HELOC: Uses and Risks” (FinHelp: https://finhelp.io/glossary/home-equity-loan-vs-heloc-uses-and-risks/) and the guide comparing HELOCs to cash-out refinances (FinHelp: https://finhelp.io/glossary/helocs-vs-cash-out-refinances-which-option-fits-your-goal/).

Practical tips to keep refinancing on track

  • Pull the title report early. Don’t wait until underwriting; discover junior liens during the application so you can start subordination requests immediately.

  • Ask lenders about subordination policy up front. Not all junior lenders follow the same rules. Some will subordinate only if the new loan’s LTV remains below a stated threshold; others will refuse unless a fee is paid.

  • Budget for subordination fees and processing times. Junior lienholders may charge administrative fees (typically a few hundred dollars) and require time to review documents.

  • Consider a cash-out refinance if paying off junior liens makes financial sense. A cash-out app can pay off second liens fully and leave only one mortgage on the title, but it may raise the LTV and affect pricing.

  • Use title insurance endorsements. Lenders often require a lender’s title insurance showing the new loan’s priority; make sure the title company will record and endorse the subordination agreement.

  • Keep communications documented. If the junior lender conditions subordination on a fee or other terms, get that in writing.

In my experience negotiating dozens of subordination agreements, lenders are more likely to cooperate when the refinance reduces borrower default risk and when the refinance leaves sufficient equity in the property.

Options if a junior lienholder refuses to subordinate

  • Pay off the junior lien as part of the refinance. This is straightforward if you have the cash or can include it in a cash-out refinance.

  • Close the junior lien. Some borrowers choose to pay and close a HELOC and then reopen a new HELOC after refinancing, though reopening can be harder after payoff.

  • Delay the refinance and reapply after the junior lien is resolved.

  • Find a lender willing to lend in a second-position environment. Some niche lenders and portfolio lenders accept unique lien situations, although rates and terms may be higher.

Common mistakes and misconceptions

  • Assuming junior lenders always subordinate. They do not. Policies vary by lender, loan type, and the borrower’s equity position.

  • Waiting to discover liens late in the process. Title searches happen early; act immediately once a junior lien appears.

  • Forgetting title insurance requirements. A signed but unrecorded subordination may not protect the new lender; recording and endorsements matter.

Legal and regulatory notes

Subordination is a contractual and recording issue, not a federal tax or income matter. Federal consumer protection resources explain mortgage servicing and second-lien interactions; see the Consumer Financial Protection Bureau for general guidance (https://www.consumerfinance.gov). Local recording practices and lien law vary by state, so consult a real estate attorney or title company for state-specific rules.

FAQs

Q: Can a HELOC stay open after I refinance the first mortgage?
A: Yes, if the HELOC lender agrees to subordinate. Many HELOC lenders will subordinate if their loan stays within acceptable LTV limits and if fees are paid. If they refuse, the alternative is to pay off or close the HELOC.

Q: Does a subordination agreement remove the junior loan?
A: No. Subordination preserves the junior loan but changes its priority. The underlying debt and payment terms remain the same.

Q: Will subordination affect my credit score?
A: Subordination itself doesn’t directly change credit scores, but paying off a junior loan or closing a HELOC as part of refinancing can affect reported account balances and utilization, which can shift credit scores.

Q: Do government loan programs (FHA/VA) allow subordinate liens?
A: FHA and VA have specific rules around subordinate liens and endorsements. Lenders who originate FHA/VA loans will determine acceptability. Consult your loan officer and review program guidance for current rules.

Checklist before you refinance when junior liens exist

  • Order a title search and lien report.
  • Confirm junior lienholders and contact details.
  • Ask the new lender what lien priority they require.
  • Send subordination requests early and follow up.
  • Budget for fees and recording costs.
  • Secure written subordination agreements and confirm recording.

Sources and further reading

Professional disclaimer: This article is for educational purposes and not personalized financial or legal advice. Rules and lender policies change; consult a licensed mortgage professional, real estate attorney, or title company about your specific situation. In my practice, I always review title reports early and advise clients to budget for subordination fees and possible payoff scenarios to avoid last-minute delays.