A junior mortgage is any mortgage loan on a property other than a first mortgage. So a second mortgage is a junior lien and it has shorter term and considerably higher interest rate because it is more risky.
The risk of the second mortgage in particular and junior mortgages in general is that they represent subordinated claims on the property’s cash flow compared to the first mortgage. In particular, in the case of foreclosure sale of the property, the lender who provided the first mortgage gets paid first, while the second mortgage lender is paid only if there is any money left from the sale, after the first mortgage lender is paid. The same is true in the case of the income produced by the property, that is, the net operating income, where first mortgage lenders have priority claim over lenders that have provided second or third mortgages on the same property.
Junior liens should be used with great caution by property investors pursuing double-digit profits as they are highly risky because of the short term and the high interest rate that characterize them. First of all, the existence of a junior mortgage on top of a first mortgage on the same property is a drain on the property’s net operating income (NOI). Usually, the NOI barely covers the monthly payment for the first mortgage, so the existence of another mortgage on the same property will likely result in negative cash flow, that is, the owner will need to use his own cash to pay the installments for the second mortgage.
Second, junior mortgages have a considerably high interest rate, which makes very difficult the creation of any positive leverage effects from borrowing money through such instrument. For a more detailed discussion on the use of borrowed funds for financing property investments read this article.
Search Our Over 500-Page Website! |
Related Posts Using Borrowed Funds to Finance Property Investments Types of Mortgage Loans Adjustable Rate Mortgages Blanket Mortgages Wraparound Mortgages Second Mortgages The Advantages of Mortgage Refinancing Leveraged IRR Calculation
Search Our Over 500-Page Website!
Return from Junior Mortgage to Real Estate Encyclopedia
|
