What does the term "subordination" refer to?

Subordination specifically refers to the act of placing something in a lower rank or position, particularly in the context of liens and mortgages. In real estate, this is often relevant when discussing the priority of claims against a property. A subordinated loan is one that has a lower priority compared to other loans, meaning that if there is a default and the property is sold, the subordinated loan will be paid off only after the primary loans are settled.

This concept is critical in real estate transactions because it helps determine the order in which creditors can claim their rights to the property. The importance of subordination lies in its function - it allows for adjustments in the hierarchy of financial claims, which can facilitate refinancing or other financial arrangements. Understanding how subordination works is essential for anyone involved in real estate, as it impacts how loans are structured and the risk involved for lenders.