Second mortgages, also known as junior liens, are loans that, in addition to the principal mortgage, are secured by a property. The loan can be set up as a solo second mortgage or a piggyback second mortgage, depending on when the second mortgage is originated. In contrast to freestanding second mortgages, which are established after the initial loan, piggyback loans are originated at the same time as the primary loan. Second mortgages can be set up as home equity loans or home equity lines of credit depending on how the money is withdrawn. Unlike home equity lines of credit, which give homeowners access to a limited amount of credit, home equity loans are given for the full amount at the time of loan origination.
The interest rates imposed on the second mortgage could be fixed or fluctuating over the course of the loan, depending on the type of loan. Second mortgages typically have higher interest rates than primary loans since the second lien holder is taking on more risk with them. The property used as collateral to secure the loan is auctioned to pay off obligations for both mortgages in the case of foreclosure, which occurs when the borrower misses a payment on the real estate loan. The lender of the second mortgage receives the leftover funds from the sale of assets after the first mortgage has been paid in full, and as a result, may not be fully repaid. This is because the second mortgage has a subordinate claim on the proceeds. Borrowers pay upfront fees related to the loan's origination, application, and evaluation in addition to recurring interest payments. The application fee and origination fee, respectively, are fees associated with processing and underwriting the second mortgage. Borrowers may also be responsible for additional fees that the lender, appraiser, and broker levy.
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