A junior mortgage, also known as a second mortgage, is a type of loan secured by real estate that is subordinate to a primary or first mortgage on the same property. In the event of default or foreclosure, the holder of the junior mortgage has a lower priority claim to the property’s proceeds compared to the holder of the primary mortgage. This means that if the property is sold to repay the outstanding mortgage debt, the proceeds from the sale will first go towards paying off the primary mortgage balance before any funds are allocated to the junior mortgage holder. Because junior mortgages carry higher risk for lenders, they typically have higher interest rates than primary mortgages. Junior mortgages can be used for various purposes, such as home improvements, debt consolidation, or financing other large expenses, and are often obtained by homeowners who have significant equity in their property.
A junior mortgage is a mortgage that is subordinated to some other mortgage or lien. Subordinated debt, such as a junior mortgage, is paid after unsubordinated, or senior, debt. The junior mortgage is sometimes called a second mortgage. The senior mortgage is called the first mortgage. It is possible for a property to have more than one junior mortgage. If a second mortgage already exists, the next junior mortgage would be called the third mortgage and be subordinated to both the first and second. A junior mortgage has a higher risk of default, and this risk is usually offset by a higher interest rate. Sometimes a junior mortgage and first mortgage can be consolidated through refinancing to lower the cost of borrowing by eliminating subordinate debt.
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This glossary post was last updated: 28th April 2024.
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