Issue With Home Equity After Refinancing First Mortgage

Question: We bought our Glendale home in 2008 with a first mortgage loan of $200,000. At the same time we got a $100,000 Home Equity Line of Credit (“$100,000 HELOC”) from the same mortgage lender. We have never borrowed any money on the $100,000 HELOC. Last year we refinanced the first mortgage loan with a new $350,000 mortgage loan, which was used to pay off the $200,000 first mortgage loan, and the remaining $150,000 we used for landscaping and an extra bedroom. Everything was fine, and we have made several monthly mortgage payments to our new $350,000 mortgage lender. We recently, however, received a letter from our new $350,000 mortgage lender demanding that we agree to “subordinate” our $100,000 HELOC to their new $350,000 loan. What does the term “subordinate” mean? Why do we have to do anything?

Answer: When your original $200,000 first mortgage loan was paid off with $200,000 of the $350,000 loan proceeds from your new mortgage lender, your new $350,000 mortgage lender wanted also to be a first mortgage loan. Your new $350,000 mortgage lender probably paid for title insurance to be a first mortgage loan, which would have required that your $100,000 HELOC lender agree to stay in second position, i.e., subordinate your $100,000 HELOC to the new $350,000 mortgage loan. Bottom line: As a practical matter, not sure that there is any problem, as the $100,000 HELOC loan has no balance owed by you, and the $100,000 HELOC lender will probably agree to subordinate to the new $350,000 mortgage loan. In any event, even if there is a problem that can’t be worked out by the title insurance company and both lenders, as a practical matter, it will not be your problem.