What Is a Junior Mortgage? - SmartAsset

A junior or second mortgage is a loan secured by a property that already has another mortgage on it. If a borrower defaults, the holder of a junior mortgage can foreclose, but only gets paid after the first mortgage is fully paid off. Proceeds from a junior mortgage may be used for down payments, renovations and many other purposes. The major risk is that the borrower could lose his or her home if they fail to keep up on the junior mortgage payments.

A financial advisor can help you figure out whether a junior mortgage or another financing option is the right fit for your needs.

Junior Mortgage Basics

A junior mortgage, also called a junior lien, uses as collateral a home or other property that is already securing an earlier mortgage. A junior mortgage is subordinate to a first mortgage, which means that the holder of the first mortgage will be paid first if the property goes into foreclosure and is sold.

A second mortgage is a junior mortgage. Third and fourth mortgages, if any, are also junior mortgages, with the earlier mortgages normally having superior rights to repayment compared to later mortgages.

Because junior mortgages have subordinate rights to repayment, lenders see them as riskier. As a result, lenders usually charge higher interest rates on junior loans. Junior mortgages also tend to have shorter repayment periods, such as five to 15 years instead of the usual 30 years.

Beyond these differences, junior mortgages are similar to primary mortgages. Borrowers must qualify in the same way, based on factors such as income, other debts and credit history. A borrower taking out a second mortgage can use the same lender that made the first mortgage loan but could also use another lender.

One difference is that junior mortgages don’t require a down payment. In fact, proceeds of junior mortgages are often used to make down payments when borrowers are purchasing a home.

Types and Uses of Junior Mortgages

A piggyback loan is one common type of junior mortgage. These loans are made at the same time as the purchase loan, but are still second mortgages with subordinate rights to repayment.

Funds from a piggyback loan are specifically used to make a larger down payment. Making a larger down payment can let a borrower get better terms on the bigger first mortgage, including sometimes not having to pay mortgage insurance premiums.

Other types of junior mortgages can be used for many purposes. Home equity loans are junior mortgages normally taken out years after the home was originally purchase. Home equity loans are secured by the borrower’s equity in the home and usually have fixed interest rates and the same payments each month. Home equity loans often pay for renovations, college tuition and consolidating high-interest credit card debt.

Home equity line of credit (HELOC) loans are also junior mortgages secured by the borrower’s home equity. However, rather than providing a lump sum of cash at closing like a home equity loan, they let the homeowner borrow against a credit limit as needed, similar to a credit card. HELOCs generally have adjustable interest rates and monthly payment amounts that can vary.

Risks and Limits of Junior Mortgages

Borrowers who take out junior mortgages risk losing their homes if they don’t make payments on time. Even if the borrower is current on the first mortgage, a junior mortgage lender could foreclose on the proper if the borrower defaults on the junior mortgage.

Not every borrower can even get a junior mortgage. It can be harder to qualify for a junior mortgage because of the higher interest rate and shorter repayment period compared to a primary mortgage.

Some first-mortgage lenders put restrictions on junior mortgages, such as requiring the borrower to have a certain amount of equity first before taking out another mortgage. And junior mortgage lenders also usually only allow the borrower to tap a certain percentage of the available equity, such as 85%.

Getting a piggyback loan to avoid paying private mortgage may be more expensive than just paying the premiums, thanks to the higher interest rate on a junior mortgage. And later on it may be harder to sell or refinance a property with one or more junior mortgages on it.

Bottom Line

Junior mortgages are real estate loans secured by properties that already have prior first mortgages on them. Junior mortgages get paid off only after first mortgages. They generally have higher interest rates and shorter terms than first mortgages used to purchase a property. Junior mortgages can be used for down payments, college tuition, renovations and other purposes. Since the loans are secured by the property, borrowers who take out junior mortgages risk losing their property if they fail to keep up payments.

Mortgage Planning Tips

Taking on another mortgage calls for input from a financial advisor. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Whether you are looking to buy a home or considering a junior mortgage, SmartAsset’s free mortgage calculator can help you determine what the payments will be and how much you can afford to borrow.