July 3rd, 2018

What is a Second Mortgage?

If you are looking to borrow with a home equity loan or line of credit, “second mortgage” is a term that’s good for you to be familiar with as it’s a term that seems relatively self-explanatory but can sometimes be open for misinterpretation.

To bring clarity, let’s first review what a mortgage is. Commonly, a mortgage is referred to as a loan used to purchase your home, and while that is true, the definition of mortgage is actually much broader. By definition, a mortgage is a loan that is secured by property or real estate. So any loan secured by a home is considered a mortgage regardless of whether you use it to purchase a home or not. This means that a home equity loan or line of credit is also, by definition, a mortgage.

In order to secure a loan with real estate, a lender will place what’s called a lien on a property. In simplest terms, a lien is a right to keep possession. For example, when a customer takes out a loan to buy a home the bank maintains possession of the home. While the customer lives in the home and makes payments each month if they were to stop making those payments the bank can foreclose on the home and sell it. The lien guarantees that the bank will get paid back the money they are still owed.

A lender that takes on the first lien position is usually taking on the most risk, so they are in the first position. Any other loans secured by the property will be placed in the second lien position. Meaning after the lender in the first lien is paid off then the lender in the second lien position begins to get paid. The majority of the time, these are going to be home equity loans or lines of credit.

If a homeowner decides to take out a home equity product and the mortgage used to purchase the home is paid off or the home was bought with cash, then that loan won’t be considered a second mortgage. It will be placed in the first lien position as a result of no other loans being secured by the home.

If you’d like to learn more or apply for an ENB HomeLine, visit our HomeLine page or give us a call at 717-733-4181. We’ll be happy to help you.