First vs Second Mortgage?

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What’s the difference between a first and a second mortgage?  Glad you asked.  As a borrower, it doesn’t matter too much other than typically a second mortgage will have a higher price (interest rate) than a first mortgage.

But why?

Well… remember, mortgages are guaranteed by the home so if you fail to pay back the bank, they will eventually have the sheriff kick you out so they can sell the house to someone else and get their money back.  When a borrower gets not just one, but two mortgages guaranteed by the home, the loans get placed in line as to which lender has claim on the property “first” or “second”.  See it?

In other words, the “first” mortgage is held by the lender who has first dibs on your home if you fail to pay.  The “second” mortgage is held by the lender who is second in line to make a claim on your home if you stop paying.  Being second in line represents more risk to that lender, therefore they charge a higher price (interest rate).

Also, it is possible to not pay the second mortgage but still pay the first, in which case the second mortgage holder can still seek remedy at law because you are in breach of contract (or something like that- we’re not lawyers).

If you pay off the first mortgage and still have a second mortgage, then the line gets shorter and the second mortgage becomes the first mortgage.  Make sense?  In other words, the words “first” and “second” represent the lender’s place in line to make claim on your home if you stop paying.

Questions or comments?  Please post them below!


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