What is a junior mortgage?
A junior mortgage is a mortgage subordinated to a first or previous (senior) mortgage. A junior mortgage often refers to a second mortgage, but it can also be a third or fourth mortgage. In the event of foreclosure, the senior mortgage will be repaid first.
Understanding the junior mortgage
Common uses for senior mortgages include stacked mortgages (80-10-10 mortgages) and home equity loans. Stacked mortgages offer borrowers a way to pay less than 20% down payment to avoid expensive private mortgage insurance. Home equity loans are frequently used to extract the equity in a home to pay off other debts or make additional purchases. Each borrowing scenario must be carefully and carefully analyzed.
Restrictions and limits on entering into first mortgages
A junior mortgage may not be authorized by the holder of the original mortgage. If there are conditions in a mortgage that authorize the placement of first mortgages, the borrower may have requirements to meet before doing so. For example, a certain amount of the senior mortgage may need to be repaid before a junior mortgage can be taken out. The lender can also limit the number of subordinate mortgages that the borrower can take out.
An increased risk of default is often associated with senior mortgages. This has led lenders to charge higher interest rates for junior mortgages than for senior mortgages. Introducing higher debt through a lower mortgage could mean that the borrower owes more money on his house than it is in the market.
If the borrower is unable to keep up with their payments and the house falls into foreclosure, the lender who provided the junior mortgage may run the risk of not recovering their funds. For example, paying the senior mortgage holder could spend all or most of the assets. This would mean that the junior mortgage lender could remain unpaid.
Borrowers can apply for junior mortgages to pay off credit card debt or to cover the purchase of a car. For example, a borrower could pursue a 15-year junior mortgage to have the funds to pay off a five-year car loan. As new debts are introduced through lower-ranking mortgages, it is possible that the borrower will no longer be able to repay its increasing obligations. Since the house serves as collateral, even if it pays off first mortgages, borrowers could face foreclosure on the first mortgages that lapse.