The primary reason for the higher interest rate is the level of risk exposure that the second mortgage creates for the lender—because of its lien position.
A lien is any legal claim or attachment, filed on record, against a property. The lien is usually a security for the payment of an obligation, such as real estate taxes, contractors' services and mortgage loans.
It may help to think of liens as a line of people who want a piece of your property. If the property is ever sold, the proceeds must first completely pay off the first lien. Whatever remains is then used to completely pay the next lien; this process continues until all liens have been paid.
If there is any money remaining after all of this, the seller/owner receives the net surplus.
Real estate taxes automatically take a priority lien position ahead of all other claims. This is simply the federal government exercising its prerogative and cutting in front of all other liens.
All other commercial or private liens are normally recorded in chronological order. First one in line gets priority. If a lien is paid, that person, agency or company will issue a release of lien, which formally removes that specific lien claim from the property's title.
Thus, when a mortgage loan is paid in full (either from a refinance, sale or regular amortization payments), that lender will issue a release of lien to remove that specific mortgage lien.
When a property is sold, the first mortgage is paid in full before any funds can be directed toward the second mortgage. In a foreclosure, the second mortgage loan may receive little if any funds from the auction proceeds.
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