Refinancing: Understanding "chain of title"

When planning to refinance your mortgage, considering how you want to address home equity loans or other liens in can help you avoid delays and complications during the refinancing process.

Mortgage refinance: Who's on first?

When you buy a home, mortgage lenders order a title report and title insurance policy. A title report shows all matters of public record affecting your property. Your lender wants to be certain that title to your property is free and clear. This positions your primary mortgage ahead of any liens against your home. Examples of secondary liens include:

• Home equity loans and lines of credit: These are mortgage loans and can be foreclosed for failing to make payments on them or on your primary mortgage.
• Mechanic's liens: If you finance home repairs or remodeling through a contractor, he or she may file a mechanic's lien against your house to ensure payment.
• Tax liens: These may be placed on your property if you owe back taxes.

When you buy a home, a title company reviews public records to verify that no liens exist other than your mortgage. When you refinance, your existing mortgage is paid off, and a new mortgage is originated. In order to maintain first lien position on your property's title report, any secondary liens must be liquidated or subordinated to the new refinance mortgage.

Refinancing and your home's current value

Your home's current value is a key factor in determining the amount of your refinance mortgage. If you have a home equity loon or line of credit, and your home is worth enough, you can pay off the home equity financing along with your existing mortgage. This may not be an option if your home has declined in value between the time you bought it or last refinanced and now.

Subordinating home equity loans and other liens

If you aren't able to pay off home equity loans and other liens through refinancing, your attorney, title or escrow company can prepare subordination agreements for secondary lien holders to sign. When recorded, a subordination agreement protects your new mortgage lender by ensuring that your refinance mortgage lender is the first lien holder. When a first lien holder forecloses on its mortgage, all other liens against the property are extinguished. Your ability to refinance may depend on secondary lien holders agreeing to subordinate their liens to your refinance mortgage.