What is a second mortgage?

A second mortgage is defined as a loan that is secured against a property that already has an existing mortgage. This means that the borrower takes out an additional loan using the equity in their home as collateral. The second mortgage allows homeowners to access funds for various purposes, such as home improvements, debt consolidation, or major expenses, leveraging the value of their property.

In the case of a second mortgage, it sits in a subordinate position to the first mortgage. This means if the property goes into foreclosure, the first mortgage lender gets paid before the second mortgage lender. Because of this hierarchy, second mortgages often come with higher interest rates than first mortgages due to the increased risk to the lender.

Understanding this concept is crucial, as it highlights the importance of equity and the way multiple loans can be structured against a single property.