August 27, 2010, Newsletter Issue #233: Second Mortgage vs. First Mortgage Details

Tip of the Week

There are two differences between your second mortgage and your first mortgage. One is legal and the other real world. A second mortgage becomes a second mortgage once it is recorded behind another mortgage, usually behind a secondary market qualified first mortgage. The term “second” does not define a product but a recording “position”. The mortgage recorded after a first is already in place becomes a second by default and definition. If a loan is written as a second mortgage, there will often be different “underwriting” standards from a first mortgage.

Instead of requiring complete documentation for all income, assets, and complicated appraisals, borrowers may be approved for and close loans quickly and easily. Depending on the use of the funds generated by the second mortgage, you might be able to use the interest paid as a tax deduction, which is obviously beneficial. But legally the only difference is the date each mortgage is recorded. The one that is recorded first, by definition, becomes a first mortgage. The next mortgage recorded becomes a second, also by definition.

While the interest rate and time allotted for repayment are usually different, which is probably most important to most of us, there is legally no difference, except for the date of the recording, between a first and a second mortgage loan.

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