A homeowner who wants to refinance his or her first mortgage when there are two mortgages on the property is typically required to obtain a subordination agreement for the existing second mortgage.
This is because without such an agreement, when the existing first mortgage is paid off, the existing second mortgage would move up to “first lien” position, which would mean that the refinance first mortgage would end up in “second lien” position, which would not be okay with the refinance lender.
A subordination agreement is an agreement from the existing second mortgage-holder that they will be in second place, behind the refinance first mortgage.
There is a new law in Maryland that will go into effect on October 1, 2013 that will eliminate the need to obtain a subordination agreement for a second mortgage for certain residential refinances. If the requirements of the law are satisfied, upon recordation, a refinance first mortgage will automatically have the same priority as the existing first mortgage that it replaces.
The requirements are:
- The interest rate for the refinance first mortgage must be lower than the interest rate for the existing first mortgage;
- The principal amount secured by the refinance first mortgage must be no more than the unpaid outstanding principal balance of the existing first mortgage plus an amount to pay closing costs of up to $5,000;
- The principal amount secured by the existing second mortgage must be no more than $150,000; and
- The refinance first mortgage must contain in bold or capital letters specific language that is set forth in the law.
Virginia already has a similar law.