What is a Junior Mortgage?

Article Summary:

A junior mortgage, also known as a second mortgage, is a home loan that uses your house as collateral, which is also used for your primary mortgage. The term “junior” means if you foreclose on your home, the lender of the junior mortgage won’t get paid until the lender of the primary mortgage is paid.

Many people take out a mortgage loan when purchasing a home, and many may also assume that you can only take one home loan out at a time. However, did you know that you can apply for a second mortgage? This is called a junior mortgage, which you can use to access equity, cover closing costs, avoid paying for private insurance, and more.

While these all sound like great reasons to get another loan, there are some things to be aware of first. Like with a primary loan, your home is collateral. Not just that, but interest rates on a second mortgage could be higher than the primary mortgage. So before you commit to another mortgage, be sure you can afford to pay for it in the long run.

What is a junior mortgage?

A junior mortgage (also called a “second mortgage” or “junior loan”) is a mortgage loan granted after another loan is already taken out. Many call the primary mortgage a senior mortgage loan. Some may take out a second mortgage to help with the home’s down payment or access their home equity loan.

How does a junior mortgage work?

Many people use a mortgage loan to purchase a house. If borrowers decide they need another loan, they can take out a junior mortgage.

Home equity loans are a major reason why people take out a second loan. Home equity is the difference between the home’s current market value and the remaining mortgage payments. A junior loan is taken out against the home equity. Borrowers may use this money for various reasons, including home projects.

Just like with a primary mortgage, a junior mortgage will be repaid over a set amount of time. Lenders offer these mortgages with either variable or fixed interest rates. However, as with most junior debts, lenders secure second mortgages with collateral like your home.

What happens if I don’t make my junior mortgage payments?

You could face foreclosure if you fail to make the monthly payment for your junior loan. This could lead to you losing your home, even if you pay off the senior mortgage. If a foreclosure occurs, the senior mortgage is paid off first.

To avoid this problem, you need to find the right lender for your unique situation. SuperMoney makes this easy with detailed reviews of mortgage lenders across the country. Take a look and find one perfect for you!

Why would someone need a second mortgage loan?

Homeowners take out second mortgages for different reasons at different times, which we’ve listed below:

  • Access an equity line of credit. Accessing home equity lines of credit is one of the main reasons borrowers seek out a second mortgage. When doing this, the borrower gets a junior mortgage at the same time as a senior mortgage. This allows borrowers to access their home equity loan, or home equity line of credit (HELOC), once they are in their new home. The second loan also provides borrowers access to their equity without refinancing the first mortgage.
    • In addition to homeowners, real estate investors may want to access their home equity loan or HELOC to get another property for their portfolio. A junior mortgage allows them to do this.
  • Fulfill a down payment. While many lenders no longer require a 20% down payment, that large of a payment also helps homeowners reduce interest rates and grow equity. If you don’t have enough to make this down payment, a junior loan can help with this and covering closing costs for a home.
  • Avoid private insurance. If a borrower does not make a down payment of at least 20%, they have to pay for private insurance. Depending on the house, 20% may be an exorbitant fee. By taking out a second loan, the homeowner can avoid this.
  • Obtain tax savings. A mortgage loan’s interest rates are tax-deductible, which provides you with considerable tax savings. These savings are especially handy for offsetting a junior mortgage’s high-interest rate charge.

Pro Tip

Even though it’s called a junior mortgage, you don’t have to use these funds on your house. Junior loans can be used for anything, from credit card to auto loan debt. However, be wary of taking out loans too quickly. Due to their high interest rates, you may have trouble paying off junior loans quickly.

What should I consider before getting a junior mortgage?

Though this could be a great option for you, there are a few things you need to consider before getting a junior mortgage:

  • Calculate your debt-to-income ratio. Make sure you can afford another loan before getting a second mortgage. Also, keep in mind that junior mortgages could lead to a higher interest rate.
  • Second mortgage loans have disadvantages. Mortgage loans use your home as collateral. If you take out a junior mortgage and don’t make payments, you could lose your home. Be careful to budget properly and known whether you can afford the payments before committing to a second mortgage.
  • Even mortgage lenders look at your debt-to-income ratio. Because of the risk presented in junior mortgages, mortgage lenders consider this ratio when reviewing these loan applications. Lenders have different requirements, but borrower’s need a ratio of around 28/36 for a second loan. Double check that you meet this number before starting an application for a junior mortgage loan.
  • Higher interest rates. Lenders could face consequences if a home falls into foreclosure, which results in higher interest rates. When looking at junior loans, take this rate into account to ensure a second mortgage is a good idea.

What are the limits of a junior mortgage?

You may want a junior mortgage, but some restrictions may prevent you from doing so. Second mortgages are risky, which means some lenders have several restrictions in place to protect themselves.

For instance, some lenders require borrowers to pay off senior mortgages before a borrower can take out a junior mortgage. Mortgage lenders may also restrict how many junior mortgages a borrower can have. Due to the increased risk of default, a lender may deny your application.

Key Takeaways

  • A junior mortgage is a second loan that’s granted when the borrower already has a mortgage loan.
  • A secondary mortgage allows you to tap into your home equity to finance other goals or purchases.
  • Because the default risk is higher, many lenders charge a higher interest rate for a second mortgage.
  • Review your financial situation to make sure a junior mortgage is right for you even with the extra fees involved.

The best mortgage lender for you

A junior mortgage can help cover various costs and access your equity, but lenders can be very picky with who they give junior loans out to. To find your ideal lender match, check out these reviews from SuperMoney’s database.

Article Sources
  1. Best Mortgage Lenders | February 2022 — SuperMoney
  2. Best Mortgage Lenders for First-Time Homebuyers | February 2022 — SuperMoney
  3. 2021 Mortgage Industry Study — SuperMoney
  4. Mortgage Brokers: Reviews & Comparisons — SuperMoney
  5. Buying a House? Here’s How to Choose the Best Mortgage Lender — SuperMoney
  6. What is a second mortgage loan or “junior-lien”? — Consumer Financial Protection Bureau
  7. Good Neighbor Next Door Mortgages — U.S. Department of Housing and Urban Development
  8. Down Payment and Closing Cost Assistance — Federal Deposit Insurance Corporation