Why it matters

Lien priority determines who gets paid first if you default. First mortgages are paid before subordinated loans, so lenders writing a new first mortgage (or a cash‑out refinance) evaluate both the existing first lien and any subordinate liens when calculating CLTV and underwriting risk.

How subordination works in refinancing

  • Lien priority: The first mortgage has legal priority. A second mortgage or HELOC is subordinate unless the subordinate lender signs a subordination agreement.
  • CLTV matters: Lenders use combined loan-to-value (CLTV) — the sum of all mortgage balances divided by the home’s appraised value — to decide eligibility for rate-and-term or cash‑out refinancing.

Illustrative example

  • Home value: $500,000
  • Existing first mortgage: $300,000
  • Existing HELOC (subordinate): $50,000
  • Desired cash-out at refinance: $50,000
  • CLTV = (300,000 + 50,000 + 50,000) / 500,000 = 80%

That 80% CLTV may be acceptable to some lenders for a rate-and-term refi but could disqualify a cash‑out refi or push you into a higher rate tier.

What lenders and loan types look for

  • Conventional lenders: Typically limit CLTV/DTI and will require subordinate liens to sign a subordination agreement or be paid off before a cash‑out refinance. Fannie Mae and Freddie Mac policies drive many conventional lender rules.
  • Government loans (FHA/VA/USDA): Have specific rules and sometimes stricter requirements around subordinate liens and seasoning. Streamline programs may avoid re-subordination but eligibility varies.
  • HELOC behavior: Some HELOCs allow a subordination agreement; others require account paydown, temporary account closure, or payoff before the new first mortgage funds.

Options when a subordinate lien complicates refinancing

1) Request a subordination agreement: Ask the subordinate lender to sign a document that keeps their lien junior to the new first mortgage. Not all lenders agree—decision is case-by-case.
2) Pay off the subordinate loan: Paying the second lien eliminates subordination issues but requires cash or settlement funds at closing.
3) Include the subordinate balance in the new loan: With a cash‑out refinance you may pay off the subordinate lien entirely as part of the new first mortgage (subject to CLTV limits).
4) Reissue or re‑record: Some subordinate lenders can reissue a HELOC agreement tied to the new first mortgage date—common with major HELOC servicers.
5) Consider a different product: If cash‑out isn’t possible, a HELOC (or a home equity loan) post‑refi may be an alternative—compare pros/cons (see When to Use a HELOC vs Cash-Out Refinance for Renovations and Cash-Out Refinance vs Home Equity Loan: Pros and Cons).

Step-by-step checklist for borrowers

  • Calculate your CLTV and expected post‑refi balance. Use the formula above.
  • Contact the subordinate lender early and ask about subordination policies and required forms.
  • Provide any lender-required documentation: pay history, lien payoff statement, or account status letter.
  • If the subordinate lender refuses, get payoff quotes and compare costs versus pursuing a different refinancing path.
  • Confirm any subordination agreement will be recorded with the county land records at or before closing.

Professional tips

  • Start conversations early: Subordination negotiations can add several weeks to a refinance timeline.
  • Get refusal in writing: If a subordinate lender declines to subordinate, get written confirmation so your mortgage lender can advise next steps.
  • Watch CLTV thresholds: A small second lien can push you over an important CLTV limit and change loan pricing or product eligibility.
  • Consider timing: Some streamline refinance programs or rate‑and‑term refis have seasoning or paperwork rules that make subordination simpler or unnecessary.

Common misunderstandings

  • “Subordination equals forgiveness”: Subordination only changes lien order; it does not reduce the balance owed.
  • “A subordination agreement is automatic”: Lenders must agree and may require conditions (paydown, fees, or documentation).

Brief FAQ

  • Can I refinance with a HELOC in place? Yes, but the HELOC lender must usually subordinate, be paid off, or meet lender conditions. (Consumer Financial Protection Bureau: consumerfinance.gov)
  • What if the subordinate lender won’t sign? You can pay it off, include it in a cash‑out refi if CLTV allows, or pursue alternate financing.

Sources and further reading

Professional disclaimer

This article is educational and does not constitute personalized legal, tax, or financial advice. Lenders’ policies and government program rules change; consult your mortgage professional or attorney for decisions affecting your situation.