mortgage that is subordinate to the lien created by a first mortgage, but senior to subsequent liens. Sometimes called a second trust, a second mortgage normally has a repayment term much shorter than a first mortgage, a fixed amortization schedule, and may have a balloon payment. The holder of a second mortgage has rights secondary to the holder of a first mortgage lien in event of foreclosure. In a second mortgage, interest due is computed on the entire principal balance owed, which is advanced to the borrower after the required three-day rescission period. A second mortgage is, in effect, an installment loan secured by the borrower's real estate, and technically, a closed-end credit arrangement with a predetermined repayment table or amortization schedule. Contrast with home equity credit.
Second mortgages are used for a variety of borrowing needs, including home improvement, investment in a business, and raising cash. Second mortgages also are commonly used to make a smaller down payment in a first mortgage if taken out when a home is purchased.
mortgage loan secured by real estate that already has a first mortgage. In case of default, the claim of the second mortgage holder is subordinate to that of the first mortgage holder. Generally, insurance companies are not permitted by state laws to offer or invest in second mortgages.
a subordinate lien, created by a mortgage loan, over the amount of a first mortgage. Second mortgages are used at purchase to reduce the amount of a cash down payment or in refinancing to raise cash for any purpose.
Example: A house costs $300,000. Available financing is a mortgage loan covering 80% of value, or $240,000. The required cash down payment is $60,000. A second mortgage is available for an additional $30,000 of value, reducing the down payment to $30,000. The second mortgage will generally carry a higher interest rate than the first mortgage to reflect the inferior position and greater risk of the second mortgage. For tax purposes, interest paid on a mortgage used to acquire a personal residence is deductible on a principal amount only up to $1,000,000. Interest attributable to acqusition debt in excess of $1,000,000 is not deductible. Interest paid on up to $100,000 of equity loans is deductible.
