Primary and Secondary Mortgages

“Primary” and “secondary” mortgages simply refers to the order in which the loans were taken out on the property. In real estate, properties can have multiple loans secured against them. The first loan taken out is the primary mortgage, the second is the secondary, and so one. While secondary mortgages are not uncommon, third and fourth mortgages are rarer, but are sometimes encountered.

If you have a primary already, why a secondary mortgage? Well, there are many reasons. The two most common are to gain access to home equity, and to develop a down payment.

Home equity is the amount of the secured loans that have been paid off. As a homeowner makes his monthly payments, the house gains equity. Most homes have a primary, and the most common secondary mortgages are made against the equity on that primary.

Sometimes, a home buyer will not have sufficient capital for a down payment. In these cases, it may be possible for the lender to make a loan to the buyer, to be used as that down payment. This loan is then seen as equity once the house is bought, and is paid off by a secondary mortgage. The homeowner then has the disadvantage of two mortgages, but can use this route to avoid certain penalties, such as the higher interest rates of 0-down loans, or private mortgage insurance. In these cases, primary and secondary mortgages work together.

In general, though, it is best to have only a primary. Secondary mortgages typically have higher interest rates, and therefore will cost more in the long run.