The reason the junior mortgage is sometimes less desirable to the lender is that there is an order of payment in the event of foreclosure. A first mortgage has priority. If it is foreclosed upon, the proceeds from the sale of the property will go to the first mortgagee to pay the loan balance (plus the costs of the foreclosure process). If there is money left over, it will go toward what is owed on the second mortgage. If there is still money available, it will pay the third mortgage. If, after all mortgagees have been paid, there is still money available, it goes to the former owner of the property. The buyer at the foreclosure takes the property free of all mortgages.
If a second mortgage is foreclosed upon, it has no effect on the first mortgage. The buyer at the foreclosure sale will have to keep the first mortgage current or pay it off in order to keep the property. The buyer will take the property free of any mortgages junior to the second, such as a third or fourth mortgage. The lower the position of the mortgage, the less chance there will be enough equity in the property to pay it off if something goes wrong. A holder of a junior mortgage can stop the foreclosure of a superior mortgage by making up the delinquent amount and adding it to his or her mortgage. He or she can then begin foreclosure of his or her mortgage if the mortgagor does not pay the delinquency.
How a mortgage is classified as first, second, etc., is strictly based on when the mortgage was dated and recorded. Unless there is a mistake or fraud involved, the process is simple. A mortgage is dated when it is signed and then recorded in the county where the property is located. Recording gives what is called constructive notice. This means that a subsequent mortgagee, for example, would legally be presumed to know of this mortgage, even if he or she had no actual knowledge of it.
Different states follow different rules for priorities and notice. In fact, there are three different theories as to priorities and notice, depending on the jurisdiction. If a borrower gives simultaneous mortgages to several lenders in order to defraud them, or if a lender fails to record the mortgage, these theories become very important. For the purposes of this discussion, there is no reason to detail them further.
Since a junior mortgage is considered less secure than a first mortgage, you will pay more in points and fees. It is a good idea to compare the benefits of a second mortgage over refinancing your first mortgage. Sit down with the real estate specialist at your bank and find out the cost of each.
The amount of the mortgage has nothing to do with priority. There can be a first mortgage for $10,000 and a second for $100,000. If you owe a relatively small amount of money on a low-interest first mortgage, you should weigh the costs of a second mortgage compared to refinancing, even if you want to borrow more than the balance on the first.
As with all mortgages, shop around. Start with banks and credit unions. If the loan is for home improvement, both the FHA and VA offer insurance and guarantees for these loans. You may even borrow an amount that exceeds the current value of your home in certain instances.