Question:

How is a subordinate mortgage satisfied?

Answer:

A subordinate mortgage may never be satisfied. All junior liens can never be sure that they will be repaid if the borrower defaults. In a foreclosure, proceeds go to the lien in the first position and there is rarely anything left for junior liens.

For example, a $500,000 property is foreclosed and sold for $400,000. A subordinate mortgage of $50,000 never gets the chance to be repaid.

However, if the first lien holder holds the subordinate mortgage, as well, he or she may try to get a better deal. Or the second lien holder could buy the first mortgage and try to get a better deal to get the subordinate loan amount back.

On the whole, subordinate mortgages carry higher risk to the lender and higher rates to the borrower.

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