There are so many loan terms floating around it is hard to keep track. Just recently I had a borrower tell me he wanted a HELOC, not a second mortgage. Well, we had gotten him a HELOC and it was a second mortgage. With that confusion I thought this was something that should be addressed.
When you get a loan, whether to finance or refinance a home, there are 2 documents that are very important, a promissory note and a deed of trust. The promissory note is a signed agreement containing a written promise to pay a stated sum to a specified person at a specific date. The deed of trust is an agreement between a home buyer and a lender that states that a homebuyer will repay the home loan and the mortgage lender will hold the property’s title until the loan I paid in full.
Once the loan is repaid in full the promissory note is marked paid in full and the dee is returned to the buyer. Now, when you first buy the home with the loan, the lender will record the Deed of Trust on title to publicly notify other parties that the owner of the property owes money to the lender. That lender would be the first to get paid should that property sell because they were the first to record on title. Think of it as getting in line to be repaid.
So, if a lender is the first to record, they are in first position. This is a first mortgage. Let’s say 1 year later the homeowner wants to put in a pool and decides to get more home financing to pay for it. The homeowner could take out another loan big enough to repay the first loan AND provide money to build the pool. Once this loan is repaid the original loan and recorded this will, again, be in first position. If the homeowner wanted to keep their first mortgage because the rate was so good, they could just take out another small loan big enough to just pay for the pool. Since this loan did not pay (or take out) the first mortgage, it would record after it on title and be in 2nd position. This would be a 2nd mortgage.
Now a 2nd mortgage could be a Home Equity Line Of Credit (HELOC), Fixed Term 2nd mortgage, Line of credit (LOC), and many other names. A lender could call it whatever they want, and the terms could vary greatly but where it is recorded on title is very simple. It is in first, 2nd, 3rd, etc. position.
