What is a junior mortgage?

A junior mortgage refers to a loan that is secondary to another mortgage on the same property. This means that in the event of foreclosure, the junior mortgage lender will only collect their debt after the senior mortgage lender has been fully repaid. This hierarchy is crucial because it determines the order in which debts are satisfied.

In practical terms, if a homeowner defaults on their mortgage, the senior mortgage (the first mortgage taken out on the property) is paid off first from the proceeds of a sale. Only after that debt is settled will the funds be available to pay off the junior mortgage. This characteristic makes junior mortgages riskier for lenders, which is why they typically come with higher interest rates to compensate for that added risk.