Introduction

Subordinate liens —things like home equity lines of credit (HELOCs) or second mortgages—matter because they claim part of your home’s equity. Lenders consider total outstanding liens when deciding how much cash you can take out, the interest rate you’ll get, and whether the refinance is allowed at all.

How lenders view subordinate liens (quick snapshot)

  • Combined loan‑to‑value (CLTV): Lenders calculate CLTV by adding the outstanding balances of the first mortgage plus all subordinate liens, then dividing by the home value. Many lenders cap CLTV for cash‑out refis (often 80% for conforming loans, but limits vary by loan type).
  • Title and payoff: Lenders require a title search. In most cash‑out refis, the new lender expects to clear or subordinate subordinate liens at closing or be satisfied that the new first lien preserves repayment priority.
  • Underwriting rules: Credit score, debt‑to‑income (DTI), and seasoning requirements still apply; subordinate liens make meeting CLTV and DTI thresholds harder.

Simple example (how the math works)

  • Home value: $400,000
  • First mortgage balance: $200,000
  • Subordinate lien: $50,000

Total liens = $250,000. If the lender’s maximum CLTV for a cash‑out is 80%, the maximum total debt allowed is $320,000 (80% × $400,000). That leaves $70,000 of total room for a new combined loan amount ($320,000 − $250,000). If you want cash out, the new first mortgage must fit within that $320,000 cap after paying off or subordinating the second lien.

Real‑world implications

  • Less accessible equity: With subordinate liens you often can access less cash than the headline LTV limits suggest.
  • Payoff vs. subordination: Some subordinate lien holders (especially smaller banks or HELOC servicers) will agree to subordinate their lien to the new mortgage; others require payoff. Getting a payoff reduces available cash at closing.
  • Limited cash‑out options: Certain programs (e.g., FHA or VA) have stricter rules about subordinate liens and may offer only limited cash‑out or require specific seasoning.

Practical strategies I use when advising clients

  • Calculate CLTV before applying: Add all outstanding loan balances and divide by a conservative appraised value. That gives a realistic ceiling on cash‑out availability.
  • Ask about subordination early: Request a subordination agreement (in writing) from the second‑lien servicer before ordering an appraisal. If they refuse, plan to include the payoff in your new loan math.
  • Compare alternatives: If subordinate liens block a cash‑out, a HELOC (if you don’t already have one), a home equity loan, or an unsecured personal loan may be better fits. See our guide on HELOC vs cash‑out refinance for tradeoffs.

Checklist before you apply for a cash‑out refinance

  1. Order a recent statement for every mortgage/HELOC and confirm current balances.
  2. Estimate your property value using comps or a broker price opinion; use a conservative value for planning.
  3. Calculate CLTV and compare to your target lender’s limits (conforming, FHA, VA, and portfolio lenders differ).
  4. Contact subordinate lien servicers to ask whether they will subordinate or require payoff and what documentation they’ll need.
  5. Run DTI and credit checks to confirm you meet underwriting thresholds (many lenders prefer DTI < 43%, though exceptions exist).

Common mistakes to avoid

  • Assuming all equity is accessible: Subordinate liens reduce available cash. Don’t plan projects around gross equity alone.
  • Ignoring payoff timing: If a subordinate lien requires payoff, factor those funds into your closing costs or into the new loan amount.
  • Forgetting closing costs: Closing charges reduce net cash to you; run a net‑to‑borrower estimate before committing.

When to consider alternatives

  • If the second lien won’t subordinate and payoff would eliminate almost all equity, consider:
  • A home equity loan or HELOC (if you don’t have one and qualify)
  • A personal loan for smaller needs
  • A hybrid approach: a small cash‑out plus subordinating remaining balance

Further reading and internal resources

Authoritative sources

Professional note and disclaimer

In my practice reviewing refinance cases, clear CLTV math and early contact with subordinate lien servicers avoid most surprises at closing. This article is educational only and does not replace personalized financial or legal advice. For advice tailored to your situation, consult a qualified mortgage advisor or attorney.