What does the term "subordination" refer to in a mortgage agreement?

The term "subordination" in a mortgage agreement refers to prioritizing one loan over another. In the context of real estate financing, subordination typically involves establishing which mortgage or lien has priority in case of default. When a mortgage is subordinate, it means that its rights to repayment are ranked lower than the rights of another loan. This can affect the ability to collect on the debt if the borrower defaults, as the senior lien would need to be settled first.

This concept is particularly important for refinancing or taking on additional debt against a property, as creditors will want to know the order of any existing claims against the property. Subordination can be necessary to accommodate loans that lenders may want to offer under certain conditions while protecting their investment. By understanding subordination, all parties involved can better assess the risks and priorities associated with the various financial obligations related to the property.