What does "subordination" refer to in the context of liens?

Subordination in the context of liens refers to the process of changing the priority of liens on a property, typically to favor a new mortgage. This occurs when a lender agrees to allow a new loan to hold a higher priority than the existing liens, which means that in the event of a foreclosure, the new mortgage would be paid off before the older liens.

This is often necessary when a homeowner seeks to refinance a mortgage or take out a home equity loan, and the new lender requires assurance that their loan will be prioritized over any existing liens. By executing a subordination agreement, existing lien holders acknowledge the priority change and allow the new financing to take precedence, effectively altering the order in which lien holders will be repaid if the property is sold or foreclosed upon.

Understanding this concept is crucial for anyone involved in real estate transactions, as it impacts the financial standing of various stakeholders in a property.