It may so happen that a borrower with an existing home loan may need additional money to either afford the closing cost of a deal or for some other uses such as remodelling the house or college tuition fees. If you are lucky you may find a lender willing to sanction you a junior mortgage loan against your house.
Junior mortgage is a secondary mortgage raised against a house, which already has a primary mortgage loan in effect against it. It could be a second, third, fourth or even fifth loan against the house. The first loan or the primary loan is called a senior mortgage loan and any further loan raised against the same collateral is known as a junior mortgage loan.
It is however different from a Home Equity Lines of Credit and is granted in addition to the primary loan. Since it is a secondary loan, in the case of a foreclosure of the property the primary loan shall be paid off first and then the junior mortgages in the order that they were raised.
Junior Mortgage loans are high-interest loans and are raised against the remaining equity of the owner of the property. But in most cases, the borrower typically has very little or no equity in the property. For this reason, most mortgage providers do not grant junior mortgages.
Some key features of Junior mortgages are:
A junior mortgage loan is associated with high risk because if the borrower defaults on the loan, in case of foreclosure the proceeding shall first be settled off against the senior mortgage loan. And only if anything remains, it shall be processed against the junior mortgages.
Due to the high-risk element, junior mortgages carry high-interest rates. Therefore only a borrower with an excellent credit score may be able to qualify for a junior mortgage loan.
To be able to raise a junior mortgage loan, the lender of the senior mortgage loan must approve it first. A borrower cannot raise a junior mortgage if the lender of the primary mortgage does not permit the same.
A borrower cannot raise a junior mortgage for an amount higher than that raised for a senior mortgage.
The structuring of junior mortgages is typically similar to that of a traditional mortgage loan. It can bear either a fixed or a floating interest rate and has to be repaid over a fixed period.
