Definition
A second lien has secondary priority to the first lien, receiving payment only after the first is satisfied. Second liens include HELOCs and second mortgages. Higher risk justifies higher interest rates.
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Second lienholders have greater risk than first lienholders, as they only recover funds if sale proceeds exceed the first lien amount. This higher risk justifies higher interest rates. In negative equity situations, second lienholders may receive nothing if sale proceeds only cover the first mortgage. Second lienholders must consent to short sales and may require negotiations regarding their recovery.
Pro Tip
Second lienholders may negotiate short sales if they risk receiving nothing. Request their approval early.
Example
A homeowner has a first mortgage of $250,000 and a second mortgage of $50,000; if the home sells for $280,000, the first mortgage gets paid and the second mortgage receives $30,000.