What does "subordination" mean in real estate finance?

Subordination in real estate finance refers specifically to the process of changing the priority of a mortgage lien. When a lien is subordinated, it means that its priority is shifted to a lower position compared to other liens on the same property. This is often done to facilitate additional financing options. For example, a lender may agree to subordinate their lien to a new loan, allowing the property owner to access more funds while ensuring the new lender has the first claim on the property in case of default.

Understanding subordination is crucial, as it affects the risk associated with lending and can influence decisions made by both lenders and borrowers. This concept is especially important when dealing with second mortgages or refinancing, where the relative positions of lienholders can have significant financial implications.