When someone buys a home, they will typically finance by making a down payment in cash, and by getting a mortgage on the rest of the cost of the home, which they pay off over a fixed period of time. This first mortgage may also be referred to as a senior mortgage. A later mortgage on the same home would be a junior mortgage. A junior mortgage may also be called a second mortgage, however it is possible to have subsequent mortgages (third and fourth mortgages).
Junior mortgages may be taken out for a number of reasons. We will explore this in more detail in the next section.
Why Might A Homeowner Take Out A Junior Mortgage?
Homeowners take our junior mortgages when they have a large item or project they want to finance, but do not have the cash for. The following are examples of some of these types of things the homeowner might need large amounts of money for:
- To purchase a vehicle;
- To do a large home improvement project or renovation, or
- To pay off credit cards. This may make sense because the mortgage will likely have a lower interest rate than the credit card. Since the card takes longer to pay off, it might make sense to get the cash from the mortgage, pay off the card, and then start paying off the mortgage at the lower interest rate.
One of the most common types of junior mortgage is called a Home Equity Line of Credit (HELOC). This liquidates the equity that has already built up in the home as the homeowner has paid on their senior mortgage, freeing up cash for the owner to use for expensive items or projects.
A second mortgage may be a home equity line of credit, a loan taken out for debt consolidation, or another loan secured by the home. Many people take out a second mortgage for debt consolidation, additional finances, or extra money to make home repairs and improvements. These may be open-ended, allowing the owner to draw money out as needed. Alternatively, they may be closed-ended, meaning they take out all the cash available at once.
Are There Any Potential Problems With Junior Mortgages I Should Know About?
There are a couple of potential issues with junior mortgages to be aware of. First of all, the interest rate on a junior mortgage will likely be higher than that on the senior mortgage. Secondly, it’s important to be aware that you are taking a risk on your home.
If you get into financial difficulties, having a junior mortgage to pay on, as well as the senior mortgage, makes it more likely that you might lose your home if you are unable to pay your mortgages. Also, you may not be able to get your junior mortgage from the same lender as your senior mortgage.
What If I Can’t Pay My Mortgages?
When a homeowner becomes unable to pay what they owe on their home, at a certain point, the banks holding the mortgages will eventually foreclose on the home. When this happens, the senior mortgage will be first in line to get paid off. Once the house is foreclosed on, any proceeds from the sale will go to paying off the senior mortgage first.
The remaining mortgages will be paid off in the order in which they were taken out. Generally, this means that the mortgages will be paid off in order from oldest to newest. However, it is possible for this to change depending on the following circumstances:
- The proof of how old the mortgages are in relation to each other depends on when the mortgages were recorded. Therefore, if the lender for the senior mortgage failed to record the date of that mortgage, the evidence may show that a junior mortgage was recorded first. The junior mortgage would then be paid off first;
- The junior mortgage may also take priority if the senior mortgage increased the principal amount on the loan; and
- Finally, the senior and junior mortgagees (lenders) may sign an agreement which allows the junior mortgage to take priority.
What Is the Order for the Distribution of Proceeds from a Foreclosure?
Once the house is foreclosed on, the proceeds will be paid out in the following order:
- Any costs associated with the foreclosure, including fees of any attorneys involved;
- Senior mortgage;
- Any subsequent mortgages, in the order in which they were taken out, oldest to newest; and then
- If anything else remains, it will go to the former owner of the home (the mortgagor).
What is the Foreclosure Doesn’t Produce Enough Funds to Pay Off the Junior Mortgages(s)?
When this happens, it does not mean the homeowner/mortgagor is free from the junior mortgage debt. They will still be required to pay the debt back.
If they are unable to do so, the junior mortgage lender may file an action against them in court, suing them to get the money they are owed. If the court grants this action, called a deficiency judgment, and the borrower claims they don’t have the funds, the court may garnish their wages or let the lender put a lien on their bank account. Or, the borrower may have to forfeit other property to cover the debt.
Do I Need a Lawyer for Junior Mortgages?
If you are considering taking out a junior mortgage, or have already taken out a junior mortgage and are worried about foreclosure, you should contact a real estate lawyer. They can answer any questions you may have, and assist you with any necessary court proceedings.