Junior Mortgage

A second mortgage that is granted in conjunction with the approval of an effective primary or prior mortgage

What is a Junior Mortgage?

A junior mortgage refers to a second mortgage that is granted in conjunction with the approval of an effective primary or prior mortgage. The primary mortgage is referred to as a senior mortgage. A junior mortgage can also be a third, fourth, or fifth mortgage granted after the security of a senior mortgage. It is important to know that a junior mortgage varies from home equity lines of credit (HELOCs).

 

Junior Mortgage

 

Summary

  • A junior mortgage refers to a second mortgage, which is granted after the approval of a first or prior primary mortgage. The primary mortgage is referred to as a senior mortgage.
  • It is important to know that a junior mortgage varies from home equity lines of credit (HELOCs).
  • In a more contextual sense, a junior mortgage can be referred to as a subordinate mortgage granted in conjunction with a still present and effective original or senior mortgage. 

 

Understanding Junior Mortgages

In a more contextual sense, a junior mortgage can be referred to as a subordinate mortgage granted in conjunction with a still present and effective original or senior mortgage. As with junior debt, a junior mortgage is repaid after the primary (senior) mortgage has been paid, in the event of a default. The proceeds obtained from the liquidation process resulting from the default are first paid to the senior mortgage provider until the asset (property) has been paid off.

Because of their ranking in terms of repayment priority, junior mortgages tend to come at higher interest rates to accommodate the risk associated with the granting of the mortgage facility. The amount borrowed through a junior mortgage facility is normally lower than the senior mortgage that was granted.

A junior mortgage is conceptually comparable to a traditional mortgage. It (the junior mortgage) can come with either fixed or variable interest rates, and it is repaid over a fixed period. Also, mortgage providers tend to charge junior mortgage application and processing fees and points, as with primary or senior mortgages.

The fees can either be insurance, documentation fees, legal fees, etc. There are also cases where the lender (i.e., mortgage provider) will charge a prepayment fee if the mortgage is paid for in advance (prepaid).  A house normally secures junior mortgages, and if the mortgage bearer defaults, the mortgage provider can foreclose on the collateralized asset.

 

Uses of a Junior Mortgage

A junior mortgage is often sought after by a borrower looking for additional funds for a downpayment or closing cost. In such a scenario, a junior mortgage can be granted in conjunction with a senior mortgage. Ideally, a junior mortgage must be secured by the equity (value of the property less outstanding senior and other preceding mortgage obligations) that a borrower has in the property.

However, in most cases, the borrower does not or may have very little equity in the property. For this reason, certain mortgage providers do not provide junior mortgages. Still, others consider granting a junior mortgage if the borrower has a commendable credit score and has met all other relevant requirements. A borrower is obligated to meet the criteria set forth by a mortgage provider to be granted a junior mortgage. He or she has to justify their ability to repay the junior mortgage in addition to the effective primary mortgage.

Also, a junior mortgage is preferred and considered a more financially viable option than unsecured loans or credit cards. The interest rates of a mortgage are tax-deductible, which provides tax savings, which can potentially offset the high interest rate charges that come with the mortgage.

Furthermore, borrowers can use or seek a junior mortgage to purchase a vehicle or pay off a credit card.

 

Potential Limitations Associated with Junior Mortgage Applications

As mentioned above, a junior mortgage is granted with a high chance of repayment not occurring because it takes secondary priority to a senior mortgage. Due to such fact, lenders may not always be keen on granting junior mortgages, as there is a considerable chance that they may lose money should the borrower default on the primary mortgage. The secondary mortgage provider (junior mortgage) is not entitled to any repayment until the primary mortgage provider has been repaid.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Fixed-Rate Loans
  • Junior Tranche
  • Secured vs. Unsecured Loans
  • Variable-Rate Mortgage