Second Mortgage
Definition and meaning of Second Mortgage in real estate.
A second mortgage is a secondary loan taken out on a property that already has a primary mortgage in place, secured by the home's accumulated equity. Because the first mortgage holds senior priority, the lender of the second mortgage faces higher risk in the event of foreclosure.
In more detail
When a homeowner takes out a second mortgage, the primary mortgage remains the first lien on the property. If the borrower defaults and the home is sold at a foreclosure auction, the first mortgage lender is paid in full before any funds go to the second mortgage lender.
Due to this increased risk, second mortgages typically carry higher interest rates than first mortgages. Common types of second mortgages include home equity loans, which provide a lump sum of cash, and home equity lines of credit, which act like credit cards. Homeowners often use these funds for home improvements, debt consolidation, or college tuition, but defaulting on the loan can lead to foreclosure.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Junior lien, home equity loan, HELOC |
| Watch out for | Foreclosure if you default on payments |
| Seniority | Paid after the first mortgage in foreclosure |
A homeowner with a house worth $400,000 and a first mortgage of $250,000 takes out a $50,000 second mortgage to fund a kitchen remodel, using their $150,000 of equity as security.
Frequently asked questions
How does a second mortgage work?
It is a loan secured by your home's equity that sits behind your first mortgage. You make separate monthly payments to this second lender in addition to your primary mortgage payments.
Can you get a second mortgage with bad credit?
It is difficult because second mortgages carry more risk for lenders. Borrowers generally need a credit score in the mid-to-high six hundreds and significant equity to qualify.