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Junior Mortgage – An overview for all borrowers

Junior Mortgage – An overview for all borrowers

Junior Mortgage – An overview for all borrowers

A small mortgage, which is subordinate to a first or prior (senior) mortgage, is called a junior mortgage. A junior mortgage often refers to a second mortgage, but a third or fourth mortgage is also considered as a junior mortgage.

This loan is secured by the home equity you have in a house. Your home equity would be the value of the house less the balance you owe on the first mortgage (or in some cases, the preceding mortgage).

Junior mortgage - How does it work?

Junior mortgages are quite identical in concept to conventional mortgages. Junior mortgages normally have a fixed period to pay it over. Many lenders charge fixed rates on junior loans, but there are others who might offer you variable rates.

Similar to a conventional first mortgage, most of the lenders may charge points and other fees against the junior mortgage. These fees may include attorney fees, title fees, insurance and documentation fees. These expenses may vary from lender to lender. In some cases, the lender may also apply a prepayment fee if being a borrower you pay off the loan early. The junior mortgage will be secured by your property, if the borrower defaults, the lender may foreclose on the house.

For example - Let’s say a home is worth $450,000 and the remaining balance of the mortgage is $150,000. If you being the homeowner wish to take out a junior mortgage, you can borrow borrow up to $150,000, means the difference between your home’s worth and the amount you owe on the first mortgage.

The most popular junior mortgages are known as home equity loans or home equity lines of credit (HELOCs). The first one is a closed-ended loan where a homeowner borrows a fixed amount and pays it back over a fixed time. THe second one is an open-ended loan where the homeowner borrows money against the home, pays it back, and can continue to keep borrowing if necessary, similar to a credit card.

When should you go for a junior mortgage?

Some of the most common uses of junior mortgages include:

  • Paying off high-interest debts
  • Financing a home improvement
  • Paying bills for an expensive medical treatment not covered by insurance
  • Paying for a child’s college tuition fees
  • Supporting the monthly budget after a sudden job loss

There are several pros and cons of taking out a junior mortgage. In general, the interest rates on junior mortgages are lower than the other unsecured loans.

For example, if a homeowner has a $10,000 credit card debt that’s charging 17% interest, it may be smart to pay off the credit card with a home equity loan that only charges 7% interest. Also, often, the interest paid on second mortgages is tax deductible. This helps to offset some of the cost of getting the loan.

Why junior mortgage matters

Junior mortgage can be a possible option compared to others like credit cards or unsecured, high-interest loans. We all know that conventional mortgage interest is tax deductible. But, the interest rates on junior mortgage will be lower if you compare the tax saving on mortgage interest.

However, not all junior mortgages are equal. Borrowers can easily compare different lenders and their fees, interest rates and repayment terms. After all, when a borrower fails to make monthly payment, the ownership of the home will be transferred to the bank automatically.

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