What is true regarding second mortgages?

Second mortgages play a distinct role in real estate financing, and the correct answer highlights their characteristics accurately.

Second mortgages are generally considered high risk for lenders because they are subordinate to the first mortgage. In the event of foreclosure, lenders holding a second mortgage are paid only after the primary mortgage lender has been satisfied. This inherent risk is reflected in the terms usually associated with second mortgages, which typically involve higher interest rates compared to first mortgages. The higher rates serve as compensation for the increased risk—and lenders face more exposure because their investment is less secure.

The other choices inaccurately depict the nature of second mortgages. They are not low risk; rather, their risk profile is elevated due to the prioritization of first mortgages in the payment hierarchy. Additionally, second mortgages often carry higher interest rates, contrary to the claim that they have lower rates compared to first mortgages. Furthermore, in foreclosure scenarios, second mortgages are indeed not paid off before the first mortgage, but rather after the first has been settled, further demonstrating the risks associated with them.