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The Top Secrets About Junior Mortgage One Should Know | CC

The Top Secrets About Junior Mortgage One Should Know

Amanda Byford
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What is a Junior Mortgage

A mortgage that is subordinate to a first or prior (senior) mortgage is called a junior mortgage

A junior mortgage is also called a second mortgage but it could also be a third or fourth mortgage like a home equity loan or lines of credit. The initial or primary mortgage will be paid down first in the case of a foreclosure.

A home loan made in addition to the home’s primary mortgage is a junior mortgage. 

A junior mortgage often comes with a higher interest rate and lower loan amount. There are also limitations and additional restrictions when you opt for this mortgage. 

A junior may be caught to finance large purchases like home remodeling, college fees, or but a new vehicle.

A subordinate mortgage made while an original mortgage is still effective is called a junior mortgage. 

If for some reason you default all the proceeds from the liquidation of the property will be used to pay off the first or primary mortgage. Only when the first mortgage has been paid off the junior mortgages would receive repayments.

Piggyback mortgages and home equity loans are the common uses of junior mortgages. 

A piggyback mortgage helps borrowers who have less than a 20% down payment so that they can avoid costly private mortgage insurance.  And a home equity loan is used to use the equity of a home to pay other debts.

The limitations with Junior Mortgages?

A junior mortgage might not be permitted by the holder of the initial mortgage without the borrower meeting certain terms and requirements before doing so. 

For example, a rule stating that before a junior mortgage can be taken out a certain amount of the senior mortgage needs to be paid off. 

There might also be restrictions by the lender on the number of junior mortgages the borrower can take.

Junior mortgages often portray an increased risk of default hence compared to senior mortgages the lenders charge higher interest rates for a junior mortgage.

What is a Junior Lien or Second Lien?

A junior-lien is taking a loan using your house as collateral even while you have another loan secured by your house. 

It means that if you can no longer pay your mortgages for whatever reason and your home is sold to pay off the debts, this loan is paid off second.

Did you know?

Since a junior mortgage is recorded after the primary loan it is considered inferior to the primary loan or the first loan.

How to Lien Stripping?

We now know that when a homeowner takes a second or third mortgage on his home then it is considered junior in priority to the first mortgage. Now since the mortgage is secured by your home as the collateral it is called a secured debt.

Lien stripping is when the lien is removed from your junior mortgage and leaving only the debt owed the stripped mortgage lien is then reclassified as unsecured debt for the purpose of bankruptcy and gets included in the Chapter 13 bankruptcy

So depending on your income and assess the unsecured debt may not be paid at all or in parts through the Chapter 13 plan. 

Once you complete the Chapter 13 repayment plan then you will receive a discharge of any remaining amount owed on your unsecured debt.

Conclusion

Borrowers might seek junior mortgages are sought by borrowers to pay off credit card debt or to cover the purchase of a car. 

When obtaining a mortgage, the borrower promises to pay back a loan plus interest over a period of time, and it is possible that the borrower will be unable to repay their mounting obligations because of the new debt with a junior mortgage. 

Because the home serves as collateral, even if the borrower pays off senior mortgages, they could face foreclosure on junior mortgages that lapse into default.

Amanda Byford

Amanda Byford has bought and sold many houses in the past fifteen years and is actively managing an income property portfolio consisting of multi-family properties. During the buying and selling of these properties, she has gone through several different mortgage loan transactions. This experience and knowledge have helped her develop an avenue to guide consumers to their best available option by comparing lenders through the Compare Closing business.

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