What is a Second Mortgage and How Does it Work?
A second mortgage is additional mortgage taken out on a home that already has a mortgage. It’s called a second mortgage based on the fact the mortgage was taken out second on the same property (i.e. a subsequent mortgage taken out after that would be known as a third mortgage).
For mortgage lenders, a second mortgage carries more risk than a first mortgage since the lender is in second position on the home’s title. In the event the homeowner defaults (fails to repay the loan), the lender in first position would be paid out first, while the lender in second position would be paid out based on whatever equity is left in the property. Sometimes it’s enough to pay out the amount owing to the lender in second position, sometimes it’s not; that’s why being in second position on a mortgage tends to be riskier. To protect themselves and account for the higher risk, mortgage lenders in second position almost always charge higher interest rates than those in first position.