A silent second mortgage is a second mortgage with no monthly payments. The best way to understand how a silent second mortgage can be used is to see an example.
My hard money commercial mortgage company, Blackburne & Sons, was recently asked to refinance a balloon payment on a nice apartment building. The problem was not the loan-to-value ratio. That was fine.
The problem was that the deal didn't cash flow. The property was owned by a 401(k) plan, and the beneficiary of the 401(k) plan was not allowed to contribute money to the property to help cover the negative cash flow. That would be an illegal 401(k) contribution.
We solved the problem using a silent second mortgage. We convinced the private lender whose loan had ballooned to accept a partial payoff. He was paid everything that he was owed, except for $75,000.
We had the original private lender then carry back his remaining $75,000 in the form of a second mortgage. The loan carried an interest rate of ten percent, but there were no payments on this second mortgage! The second mortgage had a term of three years, at which time the $75,000 in principal and the accrued interest would be due.
Volia! Because our loan was $75,000 smaller, it now cash-flowed perfectly. The private lender got most of his dough now, without the need to foreclose. The 401(k) plan could now handle the monthly payments to Blackburne & Sons without the need of monthly, illegal contributions. This was a nice win-win-win.