You're in the final stretch of buying a new home or refinancing your existing mortgage, but then you come across an unfamiliar fee called a "subordination agreement fee" in your closing costs. Don't worry, you're not alone. Many homebuyers and homeowners are puzzled by this charge, but understanding what it is and why it's necessary can help you navigate the closing process with confidence.
What is a Subordination Agreement Fee?
A subordination agreement fee is a one-time charge paid to a lender or creditor to obtain their approval for a new mortgage or refinance loan to take priority over an existing lien or debt they hold against the property. This fee covers the administrative costs associated with processing the subordination agreement.
Essentially, when you take out a new mortgage or refinance an existing one, the new lender needs to ensure that their loan will be in the first lien position. If you have other outstanding debts or liens against your home, such as a home equity loan or line of credit, the existing lenders need to agree to subordinate (or make their liens secondary) to the new mortgage.
Why is a Subordination Agreement Necessary?
Lenders require subordination agreements to protect their interests and ensure that their mortgage loan takes priority over other debts secured by the property. If a borrower defaults on their mortgage, the primary lender has the first claim on the proceeds from the sale of the property to recover their investment.
Without a subordination agreement, the existing lien holders could potentially have a higher claim on the property, making it more challenging for the new lender to recover their funds in case of foreclosure.
Examples of When a Subordination Agreement Might Be Required
Here are a few common scenarios where a subordination agreement fee may come into play:
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Refinancing with an existing home equity loan or line of credit: If you have a home equity loan or line of credit and want to refinance your primary mortgage, the lender for the home equity debt will need to subordinate their lien to the new mortgage.
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Buying a new home with outstanding debts secured by your current home: If you're buying a new home but still have outstanding debts secured by your current property (e.g., a home equity loan), those lenders will need to subordinate their liens to the new mortgage on the new home.
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Obtaining a new home equity loan or line of credit: If you're taking out a new home equity loan or line of credit while you have an existing primary mortgage, the primary mortgage lender will typically require a subordination agreement to ensure their loan remains in the first lien position.
Typical Subordination Agreement Fee Costs
The cost of a subordination agreement fee can vary depending on the lender and the complexity of the agreement. Generally, these fees range from $200 to $500 or more. Some lenders may charge a flat fee, while others may base the fee on a percentage of the outstanding loan balance.
It's essential to factor in this fee when calculating your overall closing costs, as it can add up, especially if multiple subordination agreements are required.
Tips for Managing Subordination Agreement Fees
While subordination agreement fees are often unavoidable when taking out a new mortgage or refinancing with existing liens, there are some steps you can take to manage these costs:
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Shop around for lenders with lower fees: Compare the subordination agreement fees charged by different lenders and choose the one with the most reasonable rates.
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Negotiate the fee: Don't hesitate to negotiate the subordination agreement fee with your lender, especially if you have a strong credit history and a low debt-to-income ratio.
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Consider paying off existing debts: If the cost of obtaining a subordination agreement is high, it may be more cost-effective to pay off the outstanding debts secured by your home before applying for a new mortgage or refinance.
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Roll the fee into your mortgage: Some lenders may allow you to roll the subordination agreement fee into your new mortgage, which can help manage your upfront costs but will result in paying interest on the fee over the life of the loan.
Conclusion
A subordination agreement fee is a necessary cost when taking out a new mortgage or refinancing if you have existing liens or debts secured by the property. While it may seem like an unexpected expense, understanding what it is and why it's required can help you plan and budget accordingly.
Remember to factor in this fee when calculating your closing costs, shop around for the best rates, and explore options to minimize or manage the cost. With the right preparation and knowledge, you can navigate the closing process smoothly and confidently.