A
second mortgage typically refers to a
secured loanA secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan...
(or
mortgageA mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
) that is subordinate to another loan against the same property.
In
real estateReal estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location.
"Real estate" The American Heritage Dictionary of the English Language, Fourth Edition. Houghton Mifflin...
, a property can have multiple loans or
liensIn law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
against it. The loan which is registered with county or city registry first is called the
first mortgage or
first position trust deed. The lien registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.
Second mortgages are called subordinate because, if the loan goes into
defaultIn finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
, the first mortgage gets paid off first before the second mortgage.
A
second mortgage typically refers to a
secured loanA secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan...
(or
mortgageA mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
) that is subordinate to another loan against the same property.
In
real estateReal estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location.
"Real estate" The American Heritage Dictionary of the English Language, Fourth Edition. Houghton Mifflin...
, a property can have multiple loans or
liensIn law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
against it. The loan which is registered with county or city registry first is called the
first mortgage or
first position trust deed. The lien registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.
Second mortgages are called subordinate because, if the loan goes into
defaultIn finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
, the first mortgage gets paid off first before the second mortgage. Thus, second mortgages are riskier for lenders and generally come with a higher
interest rateAn interest rate is the price a borrower pays for the use of money they do not own, for instance a small company might borrow from a bank to kick start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower...
than first mortgages.
In most cases, a second mortgage takes the form of a
home equity loanA home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education...
and the two are synonymous, from a financial standpoint. The difference in terminology is that a
mortgageA mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt...
traditionally refers to the legal lien instrument, rather than the debt itself.
The term length of a second mortgage varies. Terms can last up to 30 years on second mortgages; however repayment may be required in as little as one year depending on the loan structure.
A second mortgage can occasionally be the catalyst to
foreclosureForeclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like...
when a homeowner defaults on their loan. The second lien holder then purchases the primary mortgage (which may still be in good standing) and then forecloses which leaves the homeowner losing their home to the 2nd mortgage lender.
Generally, when considering the application for a second mortgage, lenders will look for the following:
- Significant equity in the first mortgage
- Low debt-to-income ratio
- High credit score
- Solid employment history
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