What Is a Subordination Fee and Who Pays for It?
Understand the administrative cost for altering lien priority during a mortgage refinance and how this fee impacts a borrower's final closing statement.
A subordination fee is a cost that arises when a homeowner with multiple loans on a property refinances their primary mortgage. The new lender will require its loan to have first priority for repayment in a default, which necessitates a legal process to alter the standing of the existing loans. This fee compensates the other lender for the administrative work and risk involved in agreeing to maintain a lower-priority status.
Understanding Lien Priority and Subordination
When a property is financed, the lender places a lien on it, which is a legal claim against the property until the debt is paid. If a property has multiple loans, each lien has a priority that determines the repayment order if the borrower defaults. The first loan recorded, usually the primary mortgage, holds the first lien position. Subsequent loans, like a home equity line of credit (HELOC) or a second mortgage, are junior liens with lower priority.
This ranking becomes important during a refinance, when a homeowner pays off their original loan and replaces it with a new one. The new lender, to protect its financial interest, will require that its new mortgage be placed in the first lien position. However, once the original mortgage is paid off, an existing second lien, like a HELOC, would automatically move into the first position.
To prevent this, the new lender requires a subordination agreement. This is a legally binding document where the junior lienholder agrees to keep their lower-priority position relative to the new mortgage. Without this agreement, the refinance cannot proceed because the new lender is unwilling to accept the risk of a second lien position. The junior lender is not obligated to agree and does so at their discretion.
The Subordination Fee Explained
The subordination fee is a charge by the junior lienholder for agreeing to subordinate their lien, and the borrower is responsible for paying it. The charge serves two purposes. First, it covers the administrative costs of the process, which includes reviewing the new loan, assessing the borrower’s finances, and preparing the legal paperwork for the subordination agreement.
Second, the fee compensates the junior lender for the risk of remaining in a secondary repayment position. During a foreclosure, the first lienholder is paid in full from sale proceeds before the second lienholder receives any funds. If the sale does not generate enough money to cover both loans, the junior lender can suffer a financial loss.
The cost of a subordination fee ranges from $200 to $500, but can vary by lender. Some institutions charge a flat fee, while others may base it on the transaction’s complexity. The fee is disclosed to the borrower during the closing process as a standard cost of refinancing with a second lien.
The Subordination Agreement Process
When a subordination agreement is required, the borrower’s new mortgage lender or title company submits a formal request to the existing junior lienholder. This request initiates the junior lender’s internal review process to determine if they will agree to subordinate their lien.
To evaluate the request, the junior lienholder will require a set of documents. This package includes a copy of the new loan application to understand the financing terms, a new property appraisal to confirm the home’s value, and a preliminary title report. This information allows the junior lender to assess whether the new loan structure still provides sufficient equity to protect their position.
The subordination fee is not paid directly by the borrower upfront. Instead, it is incorporated into the total closing costs of the refinance. The fee will be itemized on the Closing Disclosure, a document that details all mortgage costs, and the borrower pays it when the refinance is finalized.