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A mortgage (or trust deed) that is junior or subordinate to a first mortgage; typically, an additional loan imposed on top of the first mortgage, taken out when the borrower needs more money. The degree of risk is determined by the margin between the appraisal value and the total prior liens on the property inasmuch as the second mortgage can be wiped out by the foreclosure of any senior mortgage or lien holder (such as a mechanic’s lien or tax lien).

Because the risk involved to the lender is greater with the second mortgage, the lender’s conditions are usually more stringent, the term is shorter, and the interest rate is higher than for the first mortgage. Second mortgages usually involve separate closing costs for appraisal, title report, credit check, drafting and recording documents, and other procedures.

Second mortgages may contain a provision stating that they will remain subordinate to any subsequent first mortgage as long as the new mortgage amount does not exceed the present first mortgage. Such a lifting clause permits the mortgagor to “lift out” the first mortgage and refinance it with another first mortgage without altering the junior position of the second mortgage.
In the event of default under the prior mortgage, the second mortgagee can elect to redeem the first mortgage and foreclose under the second mortgage or add the amount advanced to the second mortgage. The second mortgagee should request that it receive a notice of any default under the first mortgage. If the second mortgage is in default, the first mortgagee can also foreclose on the mortgagor because its security has also been threatened. The second mortgagee can thus exert great pressure on the borrower to pay, yet in doing so it takes the risk that the net proceeds of a foreclosure sale will not be enough to repay the second mortgage after extinguishing the first mortgage note.

Before considering a second mortgage, the parties should check state usury provisions and local laws restricting banks and savings and loan associations from granting second mortgages or limiting the amount loaned or the interest that may be charged.