What Is a Second Trust Deed?
A trust deed is the modern day version of the mortgage. A trust deed is a legal document that uses your home as security for a loan. A second trust deed is a trust deed that is second in priority to another mortgage.
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Security Interests
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When you signed your first mortgage loan documents, you probably signed a first trust deed giving your lender a right to foreclose on your home if you default. Similarly, when you took out a home equity loan, or second mortgage, you signed another trust deed giving that second lender a right to foreclose on your home. This means there are now two lenders with security interests in your home.
Timing
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Timing is critical for the lender who holds a second trust deed. Because the lender on a second trust deed records the trust deed after the first lender records the first trust deed, this means the first lender is going to get paid first if you default on both loans. Basically, a second trust deed has an inferior claim to your home.
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Significance
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Most likely, you will never have to worry about whether a loan is secured by a first trust deed or a second trust deed. As long as you make your loan payments on time, it never matters. However, since your home is security for the loan, from the lender's perspective a second trust deed is riskier than the first trust deed. If you default, the lender with the first trust deed gets paid first. This is significant because it means your second lender will probably require a higher interest rate on the second loan to compensate for the increased risk that comes from holding a second trust deed instead of a first trust deed.
Benefits
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Even though a second trust deed is often less secure than a first trust deed, the second trust deed still has some benefits. A second trust deed makes a loan even less risky than an unsecured loan. The potential for at least some home equity as security for the loan could result in a lower interest rate for you. Banks are businesses and they understand that real estate typically appreciates in value, meaning a second trust deed could become valuable even if there is little to no equity right now.
Example
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Let's say you own a house that you purchase for $250,000. You borrow $200,000 and put $50,000 of your own money down on the home. You give the first lender a first deed of trust in exchange for the $200,000 loan. A few years later, the house is worth $280,000 so you take out a home equity loan for $30,000 and give the new lender a second trust deed. Suddenly, you lose your job and can't afford to make payments under either loan. The balance owed on the first loan is $190,000 and $28,000 on the second. Tragically, the real estate market has collapsed, and your home is now worth only $205,000. Lender number one forecloses and sells the home for $220,000. Lender one claims the first $190,000, leaving only $15,000 left for lender 2. Lender 2 is out the $13,000 difference.
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