What is the function of a subordination clause in refinancing?

A subordination clause serves a critical function in the refinancing process by allowing a second mortgage to take precedence over a first mortgage in terms of lien priority. This clause essentially alters the hierarchy of the mortgages, which is particularly important when refinancing a property that has multiple loans.

When a homeowner refinances their primary mortgage, the lender of the first mortgage may require that the second mortgage is subordinated to ensure they remain first in line for payment in case of default or foreclosure. This means that if the property is sold or foreclosed upon, the first mortgage lender will receive repayment before any subordinate lien holders, including those with a second mortgage.

This strategic shift can facilitate the refinancing process, as it allows the homeowner to access better loan terms or lower interest rates on their primary mortgage while still maintaining the second mortgage. It is essential for refinancing arrangements when there's an existing second mortgage, ensuring that all parties understand the terms of repayment and priority. Thus, the function of a subordination clause is crucial in managing mortgage debts efficiently during refinancing.