What is a first mortgage?
A first mortgage is the primary or initial loan obtained for a property. When you get a first mortgage to buy a home, the mortgage lender who funded it places a primary lien on the property. This lien gives the lender the first right or claim to the home if you were to default on the loan. Other lenders who have a lien on your home are secondary to the lender of the first mortgage.
How does a first mortgage work?
A first mortgage is typically used to finance the cost of buying a home. Depending on the type of first mortgage you get, you’ll likely need to pay a percentage of this cost upfront as a down payment. Then, you’ll be responsible for making monthly payments — consisting of a portion of the amount you borrowed plus interest, homeowners insurance and property taxes — until the loan is repaid.
The first mortgage, sometimes referred to as having the “senior” lien position, takes priority over any second mortgage, or junior lien, attached to the property. Let’s say you purchased a home with a mortgage, and later took out a home equity loan (a second mortgage). If you were to default, your first mortgage lender would have the first claim to the proceeds from a foreclosure sale. The second mortgage lender would then have a claim to the remaining proceeds, if any. This chain of priority continues if you have multiple liens.
There are some exceptions, however. If you owe property taxes, they’ll typically be repaid first before other claims, and if you’re filing for bankruptcy, a court can decide which claims take precedence.
First mortgage example
Sarah buys a home priced at $300,000 with the help of a $240,000 mortgage. This is the first mortgage on the property.
After some time, her home is now worth $330,000, and she has paid down the balance on her first mortgage to $100,000. She then decides to remodel her kitchen and takes out a home equity loan — a second mortgage — for $50,000.
Say Sarah falls behind on payments and is unable to work out a solution with her mortgage lender. The lender now has the ability to start the foreclosure process in order to recoup its losses. If her home were to sell at auction for $330,000, the first mortgage lender can recoup all of the $100,000 she still owes, and the second mortgage lender can recoup the $50,000. If the home were to sell for less, the first mortgage lender might only receive a portion of the proceeds, and the second mortgage lender might receive nothing at all.
How are first mortgages different from second mortgages?
Both first and second mortgages are secured by the property itself (the collateral for the loan), but a first mortgage is used to buy the property, while a second mortgage can be used for a variety of reasons. These can include funding home renovations, consolidating debt or paying for a college education, healthcare costs, a vacation or other expenses.
Second mortgages can also be used to help you buy a property. Many down payment assistance programs are constructed as a first and second mortgage, with the second mortgage covering the down payment and closing costs.
Because they are riskier for a lender, second mortgages usually have higher interest rates than first mortgages. The two most common types of second mortgages are home equity loans, which have a fixed rate, and home equity lines of credit (HELOCs), which have a variable rate.
Lastly, at tax time, you can deduct the interest on your first mortgage up to a certain threshold. You can only deduct the interest on a home equity loan if you used the funds to improve your home.