What Is a Junior Deed of Trust?

If you have home equity, your house has the potential for a second loan.

If you have home equity, your house has the potential for a second loan.

Stealing a home by snagging a house priced below real estate market value gives you built-in equity. This equity offers a chance to apply for a secondary home loan. Home seconds, sometimes called junior deeds of trust, give you the ability to turn your equity into liquid cash. The only catch is you must have the credit to qualify for the second home loan -- and the income to make the loan payments.

Mortgage Loans and Trusts

A deed of trust means the lender makes a loan for your new house and holds the right to your house in exchange for making the loan. Not all states use the deed of trust; some states use other mortgage financial instruments. Even though the terminology is different, a deed of trust has the same impact as signing a mortgage loan in other states. The terms for junior trust deeds typically include a higher interest rate than you got on your first mortgage. This is to pay the lender for taking added risk -- if you default on your loans, the junior deed holder will have to get in line behind the first mortgage lender before it can collect anything.

Filing and Recording

Your deed of trust, both primary and secondary, is filed and recorded to make the document official, although the law doesn't require either action. Your lender requires the filing to protect its interest in your house. Filing and recording allow your lender to claim rights to the equity in your house, should you walk away from the house or fail to pay your loan. The filing and recording date allows your first mortgage lender to claim primary collection position ahead of any other loans or contract liens, including second or junior trust deeds that are filed after your first mortgage loan.

Primary and Secondary Loans

The first or primary mortgage agreement typically includes a subordination clause letting you know in legal terms that any other loan taken on your house is secondary to your first loan. That means your primary lender has the right to make the first claim to any proceeds if your home is sold or the lender forecloses on your house. The interest you pay for both primary and secondary loans qualify for deductions under federal and state tax laws, provided the lender makes the loan on your home and not on a rental property you own.

Second Advantages

The advantages of a junior deed of trust include extra cash from your home equity. If you can manage your first home loan payments with your current income and investments, a second loan might give you a chance to add a garage or bedroom to your house. Some owners use seconds to update a kitchen or bathrooms to add equity to the house. The lender makes no restriction on the money and some people use second mortgages to pay for college or a new car when interest rates for those purchases are higher than they are for a second home loan. Since the federal tax codes allow taking deductions for interest paid on home loans, taking out a second on your home might provide additional savings compared with other loan products.

About the Author

*I have written chapters and articles for Oxford and Harvard University Presses, ABC-CLIO, and others. Arcadia Press published two of my local history texts and I have also written for numerous "article sites," including Pagewise in 2002. My "How to become a...real estate agent" is available as an online text from a Canadian publisher. *I taught writing courses at a branch campus of Indiana University. *I held a California real estate license and have remodeled four of my own homes and advised others on financing homes, repairing credit to qualify for loans, and managing construction (including meeting local, state, and federal regulations for restoration and development grants). *I served as an AmeriCorps*VISTA volunteer and wrote nearly $75,000 in small education grants (under $1,000). *My travels include frequent road trips in Canada, Mexico, U.S., and Europe. I attended school at Cambridge University and used this as a base to explore the UK and Europe.

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