Any time you borrow money against the equity in your home, the transaction involves two critical documents: the mortgage itself and a promissory note. The mortgage document details the terms of your loan. The promissory note is your pledge to pay back what you borrowed. The distinction is critical if your first mortgage lender forecloses.
Liens Are Prioritized
Liens against property are typically prioritized according to the date they’re placed. The first -- your original mortgage -- is top dog, second only to tax liens. The second mortgage is usually next in line if no creditors or judgment holders placed liens between the time you took out the first mortgage and the second. Priority is important because the first lienholder in line is the first to get paid from the proceeds of a foreclosure sale. If the property doesn’t sell for enough to cover the original mortgage and the lender’s foreclosure costs, no one else gets any money. If it sells for more, the second lienholder gets the difference, but it’s often not enough to pay off the entire debt.
The Promissory Note Still Makes You Liable
Foreclosure is a magic wand that wipes out all liens against the property when the home is sold to a new buyer. But that promissory note you signed still exists. Without the lien, the debt becomes unsecured, but it’s still a debt that you’re liable for. The second mortgage lender has the right to sue you for the unpaid balance if you don’t voluntarily make arrangements to pay it off, regardless of the fact that you no longer own the home.
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