When you purchase a home with the help of a loan, you sign either a mortgage or deed of trust at closing, depending on where you live. Both documents give the lender an ownership interest in the property until you repay the loan. Historically, the lender held the title deed to secure his ownership rights. While this practice has waned due to the widespread recording of deeds, the lender's right to hold the deed remains. By contract, a puisne mortgage is not protected by depositing the deed with the lender; it is a second or junior mortgage, where the loan is subordinate to the primary mortgage.
Why Have a Puisne Mortgage?
Puisne mortgages often are referred to as inferior or junior mortgages because they are created after a primary mortgage already has been taken out against the property. A homeowner typically creates a puisne mortgage whenever she borrows money -- other than a first mortgage -- and offers her property as collateral for the loan. Examples include second mortgages, home improvement loans and home equity lines of credit. HELOCs allow homeowners to liquidate equity in their home to spend in any way they wish and are commonly used to consolidate existing debt.
Mortgage Lenders' Priority
When you sign a mortgage, you give your lender the right to take full legal possession of your home and sell it to pay off your debts if you fall delinquent on your payments. If you have more than one mortgage, all lenders are entitled to receive the proceeds of sale. The date of the mortgage lien determines who gets paid first. If there is enough equity left in the home after the primary lender has taken his share, the money is applied to the second and any subsequent mortgages. In a foreclosure situation, there may be not enough equity to repay all loans completely. In this scenario, the junior lender does not receive the full amount he is owed.
Priority issues aside, junior mortgages are essentially the same as primary mortgages. In order to qualify for a puisne mortgage, the borrower must meet the lender's requirements and prove that she can repay the loan. The junior lender takes into account the borrower's existing debt load, including her payment commitment under the primary mortgage. He assesses her credit history, credit score, income, employment and other factors to determine her overall creditworthiness. He also determines the amount of available equity in her home. As lenders requirements change, the fact that a borrower secured a first mortgage does not mean she is prequalified for a second.
Things to Consider
Second mortgages generally carry higher interest rates to protect junior lenders against the risk of losing money in a foreclosure situation. They also tend to have shorter terms. Together, this means larger monthly payments and high overall costs over the lifetime of the loan. As with any loan, a second mortgage adds to a homeowner's overall debt load. If you cannot keep up repayments, you could lose your home. On the other hand, taking out a puisne mortgage can be significantly less expensive than refinancing the primary loan on your home, particularly if you benefit from low major-loan interest rates.
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