Primarily, the rights of a second mortgage on a property are always subordinate to the rights of a first mortgage. EXAMPLE: If a foreclosure occurs then the holder of the second mortgage would be paid only after the lender who holds the first mortgage is paid. NOTE: A second mortgage is actually a lien whereby an amount is given and this amount is to be paid off over a particular period of time.
Selling a home with a Second Mortgage on it
Having a second mortgage, in most cases, should present few problems when selling a home. Furthermore, the presence of a second mortgage won’t hinder the selling of most homes. However, it is always prudent for the home owner to be aware of any potential problems that could arise. In other words, a homeowner who is armed with the proper knowledge can make a successful sale.
There is little legal difference between first and second mortgages even though most second mortgages are crafted differently from the traditional first mortgage. EXAMPLE: any mortgage recorded after another loan, from a legal standpoint, is a second mortgage. Lenders put together second mortgages as either home equity lines-of-credit (HELOCs), or shorter term, higher interest rate, full disbursement mortgages for homes.
Selling property with a second mortgage reduces the seller’s cash-received at close of sale. When the closing documents of the sale are prepared, the title company, escrow agent or attorney will include the second mortgage payoff amount before the final distribution of funds to the seller.
IMPORTANT NOTE: As stated previously, in most cases having a second mortgage should not cause problems when you sell your home. Something that should be noted, however, is that
- The required payoff total for the second mortgage could be a considerably large dollar amount if you need to replace the loan after you purchase a new home and if interest rates have increased since you received your current second mortgage.
- Should you require another second mortgage and your financial condition (credit score or employment) has worsened, you may not qualify for a new loan.
- If this is the case, an otherwise irrelevant issue, may have now become significantly important to you.