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Which of the following is an example of a subordinate loan?

  1. Home equity loan.

  2. Purchase money mortgage.

  3. Second mortgage with higher interest rates.

  4. Conventional loan.

The correct answer is: Home equity loan.

A home equity loan is considered a subordinate loan because it typically takes a lower priority in the event of foreclosure compared to the primary mortgage on the property. In the hierarchy of loans, the primary mortgage is first in line for repayment, and any subsequent loans, such as a home equity loan, are classified as subordinate loans. This means that if the property is sold or foreclosed upon, proceeds from the sale will first go to pay off the primary mortgage before any funds are directed to the subordinate loan. Other types of loans mentioned, such as a purchase money mortgage or a conventional loan, are generally used to finance the initial purchase of a home and serve as a first mortgage, placing them in a senior position over subordinate loans. A second mortgage, while it might share some characteristics of a subordinate loan, does not inherently have to carry higher interest rates, as interest rates can vary based on the lender's policies and the borrower's creditworthiness. Thus, a home equity loan distinctly fits the definition of a subordinate loan due to its position in the repayment hierarchy.