Definition
A subordination agreement is where a lienholder agrees to accept a junior position to a new lien, reducing their priority in exchange for consideration. Allows new financing while preserving existing liens.
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Subordination allows property owners to refinance or take out additional loans while keeping existing liens in place. For example, a homeowner with a home equity loan might refinance the primary mortgage; the equity line would subordinate to the new mortgage in exchange for continued availability. Subordination requires the junior lienholder's written consent and typically involves some consideration or preservation of the junior loan's terms.
Pro Tip
Obtain subordination agreements in writing to document all lienholders' consent to priority changes.
Example
A home equity line subordinates to a new primary mortgage, agreeing to accept junior position to allow the refinance while preserving the HELOC.