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Subordination is the process of ranking home loans (mortgage, HELOC or home equity loan) by order of importance. ... Through subordination, lenders assign a “lien position” to these loans. Generally, your mortgage is assigned the first lien position while your HELOC becomes the second lien.
Why does subordination matter?
In a foreclosure, your mortgage and HELOC must be paid off with the equity in your home. Unfortunately, a home’s equity cannot always cover the full cost of both loans. Subordination addresses this problem with pre-established lien positions.
The first lien is always paid off first. (In this case, that’s your mortgage.) Equity can only be allocated to pay off the second lien once your mortgage is paid in full. If there were a third lien, it would be paid off after the second lien. And so on.
When there’s not enough equity to cover what’s owed on your second lien, the HELOC lender loses money. Subordination cannot magically pay off loans, but it does help lenders estimate risk and set appropriate interest rates.