Subordination is a term that we're all familiar with.
If you have two mortgages on a property and you refinace one of the mortgages, the subordinate mortgage, the second mortgage, is going to move up in the servicable pecking order; in other words, mortgage hyponymy, class, position, rank and file.
As an example, if you have a first mortgage for 100 thousand dollars and have a second mortgage of 20 thousand dollars and you want to refinace the first mortgage to 200 thousand dollars, you have to pay off the first and second mortgages before you can refinace to the larger loan value.
What happens is that if you fail to pay off the second mortgage it automatically becomes the first mortgage, a new pecking order, and you could really have some trouble on your hands with the lender if your not careful about your position and the way the refinance takes place if the mortgage in the first position isn't satisified.
The 2nd mortgage automatically becomes the first mortgage when the first mortgage is paid off.
When you eliminate one of the mortgages the next mortgage in line will take the place of the one that's been eliminated.
Since the mortgages don't indicate which position (1st, 2nd, 3rd, etc.) they're in by virtue of the language contained within the body of the mortgage, the governing factor over which position they're in is time. More specifically, the time that they're recorded, with the earliest recorded mortgage having seniority, or the first position in the queue.
It's generally understood that most lenders want to occupy the first position.
If you believe that keeping the second in the second position is advantageous to you, because of something like a low interest rate on the mortgage, then the use of a subordination clause can accomplish this.
Now the property can be refinanced without having to pay off the second mortgage.
Chime in lenders !
Next: The Performance Clause
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