Second Mortgages

Second mortgages (2nd Mortgages) usually refers to a loan that is secured by real estate and is in subordinate position to another home loan on the same property.

When financing real estate a property may have multiple loans or liens attached to it. The first loan or mortgage registered to the property is considered the first or primary mortgage. Subsequent mortgages registered are considered a second mortgages or 2nd mortgages.

In most situations a 2nd mortgages comes in the form of a home equity loan. Home equity loans and second mortgages are exactly the same thing. The term loan simply refers to a debt whereas the term mortgage refers to a loan secured by a property. In effect, a second mortgage is a home equity loan secured by a property.

When a home is foreclosed on and sold the holder of the primary mortgage is paid first, then the second mortgage loan and so on. Since subsequent lien holders have a higher risk of loss 2nd mortgages usually have a higher interest rate then first mortgages.

The repayment period of second mortgages can vary. A 2nd mortgage loan may have a term as long as 30 years, or as short as one year, depending on how the loan is structured when it is originated.

Occasionally second mortgages are the cause of foreclosure proceedings. When the home owner falls behind on the 2nd mortgage the lien holder may buy the first mortgage loan from the issuing bank. If there is enough equity the lien holder may initiate foreclosure proceedings and sell the home at a profit.

Typically, when a home owner applies for a second mortgage loan the lender will analyze the borrower’s current equity in the property, debt to income ratio, credit score and employment history. If these variables lead the lender to believe there is a low risk of default the lender will issue a 2nd mortgage loan.