What is a First Mortgage?
A first mortgage is a primary lien on a property. As the main loan that finances the purchase of a property, it holds precedence over any other liens or claims if there is a default. It’s termed a first mortgage because it is the original mortgage taken on any property, not necessarily the mortgage for a borrower’s first home. When you refinance, the refinanced mortgage assumes the position of the first mortgage.
Key Takeaways
- A first mortgage is the primary lien that secures the mortgage on the property.
- Homeowners can take out second mortgages against their property’s equity for additional funding needs.
- If the loan-to-value (LTV) ratio exceeds 80%, private mortgage insurance (PMI) is often required.
- Mortgage interest on a first mortgage can be tax deductible if you itemize expenses on your tax return.
Understanding First Mortgages
When purchasing a property, buyers might choose to finance it through a mortgage—a loan from a lender repayable in monthly installments including both principal and interest. The lender gains a lien against the property as security for the loan. This initial mortgage taken out by a buyer for purchasing a property is referred to as the first mortgage.
An individual can have multiple properties, with each property’s initial mortgage being its first mortgage. For instance, a property owner with three separate homes may have three distinct first mortgages.
First Mortgage and Loan-to-Value Ratio (LTV)
The LTV ratio measures the amount of the mortgage against the home’s appraised value. If the first mortgage’s LTV is greater than 80%, lenders generally require PMI. It can sometimes be more cost-effective for borrowers to cap their first mortgage at 80% LTV and seek secondary financing for additional borrowing needs.
PMI can be eliminated once the LTV drops to 78%, often by refinancing the remaining balance into a new first mortgage. Secondary loans, which usually have higher interest rates, need to be repaid as part of this refinance process.
Taxes on a First Mortgage
The interest paid on a first mortgage is tax deductible if you itemize expenses on your tax returns. This can reduce taxable income by the amount of interest paid within a year.
Requirements for a First Mortgage
First mortgage requirements differ between conventional loans and government-backed loans like those from the FHA, USDA, or VA. These criteria include:
- Minimum credit score needed to qualify
- Down payment amounts
- Closing cost responsibilities
- Loan repayment terms
- Interest rates
The type of property also influences the mortgage process. For example, FHA loans can approve homes with as little as 3.5% down payment and lower credit scores but require that the property meets specific standards.
First Mortgage vs. Second Mortgage
A first mortgage implies potential for additional mortgages on the property. Second mortgages, like home equity loans or HELOCs, borrow against the property’s equity and are subordinate to the first mortgage. Therefore, proceeds from the home sale first settle the first mortgage, then the second.
Differences between First and Second Mortgages:
| First Mortgage | Second Mortgage |
|---|---|
| Fixed or variable rates | Fixed rates for home equity loans; variable rates for HELOCs |
| Home serves as collateral | Home serves as collateral |
| Primary lien, gets paid first | Secondary lien, paid after the first mortgage |
| Loan limits vary | Loan limits from 75% to 100% of home equity |
| May require PMI | Usually not affected by PMI |
Your ability to secure a second mortgage depends on your credit score, income, and home equity.
Example of First Mortgage in Action
Suppose a homebuyer secures a $250,000 first mortgage and later takes a $30,000 second mortgage. If the borrower defaults after repaying $50,000 of the first mortgage, and the home sells for $210,000 at foreclosure, the first mortgage lender gets $200,000, while the second mortgage lender receives the remaining $10,000.
Higher interest rates usually apply to second mortgages due to their subordinate claim status.
Next Steps If You’re Struggling With Mortgage Payments
If you face difficulties meeting payments, consider options like loan modification, short sale, or deed in lieu of foreclosure.
Frequently Asked Questions
Can I have two mortgages at the same time?
Yes, you can have a first mortgage to purchase a home and a second mortgage or home equity loan for property improvements.
Is a Second Mortgage Superior to a First Mortgage?
No, second mortgages are subordinate to first mortgages concerning repayment if there’s a default.
What Is the Downside to a Second Mortgage?
Second mortgages increase monthly financial obligations and risk of default if unmanageable.
Is Taking Out a Second Mortgage a Good Idea?
It could be if you’re financially stable and can manage repayments. Otherwise, reconsider if your income is unstable or emergency savings are lacking.
The Bottom Line
First mortgage loans enable home purchases and take precedence over any subsequent second mortgages linked to the property. Understanding the mortgage process, requirements, and differences between loan options helps buyers make informed decisions. Shopping around for the best mortgage rates is also crucial for optimal home loan deals.
Related Terms: home mortgage, loan-to-value ratio, private mortgage insurance, tax deduction.
References
- FDIC. “First Lien Mortgage Products.”
- Consumer Financial Protection Bureau. “What Is Private Mortgage Insurance?”
- Internal Revenue Service. “Publication 936 (2019), Home Mortgage Insurance Deduction”.
- Consumer Financial Protection Bureau. “What is a mortgage?”
- Consumer Financial Protection Bureau. “What is a loan-to-value ratio and how does it relate to my costs?”
- U.S. Department of Housing and Urban Development. “Let FHA Loans Help You”.
- Consumer Financial Protection Bureau. “What Is a Second Mortgage Loan or Junior-Lien?”
