Second Mortgage

Second Mortgage — Second mortgages allow homeowners to tap into their equity without refinancing their primary loan. They can take the form of a fixed-rate lump-sum loan or a revolving home equity line of credit (HELOC). Because the lender accepts a subordinate position, second mortgages typically carry higher interest rates to compensate for the added risk.

In the secondary note market, second mortgages trade at steeper discounts than first-lien notes because the junior position means recovery depends on sufficient equity after the senior lien is satisfied. Investors purchasing second-mortgage notes must carefully evaluate the combined loan-to-value ratio, the status of the first mortgage, and the borrower's payment history on both obligations. Despite the elevated risk, second-lien notes can offer attractive yields, particularly when the underlying property has substantial equity and the borrower is motivated to protect their ownership stake.