When buying a home, you have several options for securing financing. Your first mortgage is always considered to be a senior mortgage. Any other mortgages you take out are considered subordinate. Subordinate financing is seen in home equity loans or in some cases of refinancing.
Subordinate financing is secondary to a primary mortgage. When a mortgage is taken out, it is backed by collateral: the home. The same is said for a home equity loan. The loan is secured by the property. In some cases, a home buyer will choose to take on an 80/20 loan. In these cases, 80 percent of the first mortgage is senior, and 20 percent of the second mortgage is considered subordinate.
When a person purchases a home and defaults on the mortgage, the senior lender is paid back first. That said, it is also within the rights of the subordinate lender to seek foreclosure as a way of recovering the debt the lender is owed. Subordinate financing is not typically recommended in buying a home as it has several drawbacks.
When a homebuyer utilizes subordinate financing, they typically write two mortgage checks each month. The interest rate tends to be higher on these secondary loans, and the combined monthly payment is normally higher than when a person takes on a single mortgage. One of the reasons that people do choose to take on a subordinate mortgage is to avoid the costs of a down payment and, depending on how the loan is structured, to eliminate private mortgage insurance.
If you have questions regarding mortgages or how to finance your home purchase, a licensed real estate agent can offer assistance.