Definition
A Second Lien (also known as a Second Mortgage) is a subordinated lien created by a mortgage loan that is taken out over and above the amount of a first mortgage. Because it is secondary in nature, it is also referred to as a junior lien. This type of loan can be utilized at the time of purchase to minimize the cash downpayment required or during refinancing to secure cash flow for any purpose.
Examples
- Home Equity Loan: A homeowner may take out a home equity loan (a type of second mortgage) to pay for home improvements, medical expenses, or college tuition.
- Purchase-Money Second Mortgage: During the home-buying process, a buyer may use a second mortgage to cover the down payment, thus lowering the amount of cash they need to bring to the table.
- Cash-Out Refinance: In a refinancing scenario, a second lien can allow a homeowner to access the equity they have built up in their home without disturbing the primary mortgage.
Frequently Asked Questions (FAQs)
What is the primary difference between a first and second mortgage?
A first mortgage is the initial loan taken out to purchase a property, and it holds priority for repayment over any other loans. A second mortgage is subordinate and only comes into play if the first mortgage is already paid off in case of foreclosure.
Can I remove a second lien from my property?
Yes, it is possible to remove a second lien through repayment or refinancing the primary mortgage to include the amount of the second lien.
Are interest rates higher for second liens?
Typically, interest rates on second liens are higher than those on first mortgages due to the increased risk for the lender.
What happens to a second lien in case of foreclosure?
In the event of foreclosure, the first mortgage lender has priority on proceeds from the sale of the property. Only after the first mortgage is paid off does the second lienholder receive any remaining funds.
Can a second lien negatively impact my credit score?
Yes, failure to make timely payments on a second lien can negatively affect your credit score similar to any other loan.
Related Terms
- First Mortgage: The initial loan taken out to purchase a property, having first priority over any subsequent liens.
- Junior Mortgage: Another term for a second mortgage, indicating its subordinate status relative to a first mortgage.
- Wraparound Mortgage: A type of mortgage where the new lender assumes responsibility for an existing loan while giving additional financing.
Online Resources
Suggested Books for Further Studies
- “Home Buying Kit for Dummies” by Eric Tyson and Ray Brown - A comprehensive guide for home buyers to understand various mortgage options including second mortgages.
- “The Book on Mortgage Investing: How to Invest in Private Mortgages for Consistent Cash Flow” by Elysia Stobbe - This book covers different types of mortgages, focusing on practical investment strategies.
- “Real Estate Financing: Where to Get the Money You Need to Buy Property” by Steve Berges - Offers insights into various financing options including second liens.
Fundamentals of Second Lien: Real Estate Basics Quiz
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