When a loan is taken against an asset that already has been used to back another loan the new loan is known as second mortgage or subordinate mortgage. The first loan that was taken and registered against the property is the first mortgage while the next is the second and then the third and so on. The second mortgage is also known as the subordinate mortgage because it is only repaid after the first mortgage has been paid in the event of a default. Based on this principle an asset or property can be used to secure multiple mortgage loans. Second mortgage loans can be used to cover education cost, home renovation, emergencies and debt consolidation. The second mortgage section of the Iran Museum of Loans and Mortgages has two Second Mortgage exhibits on display.
Second Mortgage Home Equity Line of Credit is a kind of second mortgage that is taken on demand as the need arises. This second mortgage package provides a line of credit that is open and can be drawn on as emergencies or need arises. Usually the total amount of credit accessible is based on the home equity balance. For example a house that is worth $100.000 and has a first loan of $75,000 can be used to secure a home equity line of credit that is worth $25,000. Second mortgage loans are useful but are considered more risky to the lender and so attract higher interest rates.
A second Home equity loan is a loan taken on the equity or the value of the home property. This kind of loan is usually more expensive than the first loan on that property because the second lender bears more risk. In the event of a default on any of the loans the property is sold and used to pay the first mortgage before the second. The lender thus charges higher interest. This second mortgage package is different from home equity line of credit as the loan is given in a lump sum. The value of the second mortgage can be based on the value of the remaining value of the asset after deduction of the cost of the first mortgage although it could also be more than that.