What is the definition of subordination of a mortgage?

Subordination of a mortgage refers to the process in which a later mortgage is given priority over an earlier mortgage in terms of claims on the property in the event of foreclosure. This means that if the property goes into foreclosure, the more recently issued loan will be satisfied before the original loan. Subordination is often necessary when a homeowner wishes to take out a second mortgage or refinance their current loan and requires the new lender to have a higher claim in the event of default. By allowing the subsequent mortgage to take precedence, the borrower can typically access better terms or additional funds based on their home equity.

This process highlights the significance of the order of loans on a property, as it directly affects the rights of lenders in recovery scenarios. Understanding subordination is crucial for real estate professionals as it has implications not only for financing but also for property ownership and investment strategies.