What does "subordination" mean in a mortgage context?

In the context of mortgages, "subordination" refers to the process of changing the priority of a loan in relation to other debts secured against the same property. This is particularly important when more than one mortgage or lien is involved for a property. When a loan is subordinated, it means that it is placed in a lower priority position compared to other loans. In practical terms, this can affect the order in which creditors are paid in the event of a foreclosure. For example, if a borrower consolidates their debt and needs to take a second mortgage, the lender of the new mortgage might require that the new loan be in a subordinate position, meaning it will be paid after the primary mortgage in case of a default.

Understanding subordination is vital for both borrowers and lenders as it can influence loan terms, interest rates, and the overall feasibility of refinancing or taking out additional loans. This knowledge helps ensure that the order of payments aligns with the loan agreements and the borrower's financial strategy.