What is a first mortgage?
Key takeaways
- A first mortgage is the primary or original loan on a home, typically used to buy the property.
- First refers to not only the order in which the loan was obtained, but also the lender’s lien position on the property. If your home were to be foreclosed upon and sold, the lender of the first mortgage would have first claim to the proceeds.
- Generally, first mortgages are easier to qualify for than second mortgages, such as a home equity loan.
What is a first mortgage?
A first mortgage is the primary or initial loan obtained for a property.
When you get the first mortgage loan 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 claims 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, in cash — the down payment — and borrow the rest. Then, you’ll be responsible for making monthly payments until the loan is repaid.
For lenders, the first mortgage — sometimes referred to as having the senior lien position — takes priority over any second mortgage, or junior or subordinate lien, attached to the property.
Let’s say you purchased a home with a mortgage, and later took out a home equity loan (a type of 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 on the home.
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.
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Example of a first mortgage
Say Sarah buys a home priced at $450,000 with the help of a $360,000 mortgage. This is the first mortgage on the property.
After some time, her home is now worth $530,000, and she has paid down the balance on her first mortgage to $250,000. 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 $530,000, the first mortgage lender could recoup all of the $250,000 she still owes, and the second mortgage lender can recoup the $50,000. If the home sells for less, though, the first mortgage lender might only receive a portion of the proceeds, and the second mortgage lender might not receive anything at all.
First Mortgage vs. Second Mortgage
Both first and second mortgages are secured by the property itself (meaning the house serves as the collateral for the loan), but a first mortgage is most often used to buy the property, while a second mortgage can be used for any reason, such as:
Second mortgages can also be used to help you buy a property. Many down payment assistance programs in fact amount to second mortgages: After you take out the first mortgage, you take out another, smaller loan to cover the down payment, closing costs and other immediate cash expenses.
Keep in mind: Often these types of second mortgages come with low interest rates and generous repayment terms; they may even be forgivable after a certain number of years.
Because they are riskier for a lender, second mortgages generally have higher interest rates than first mortgages. The two most common types of second mortgages are home equity loans, which usually have a fixed rate, and home equity lines of credit (HELOCs), which usually have a variable rate.
If you put down less than 20 percent for your first mortgage, you’ll pay private mortgage insurance (PMI) premiums. This is another key difference between first and second mortgages: the latter usually don’t require PMI or, in fact, a down payment at all. Your home equity — the portion of the house you already own outright — in effect acts as your cash contribution to the deal.
Lastly, if you itemize 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 or HELOC if you used the funds to substantially improve or repair your home.
First mortgage |
Second mortgage |
|
|---|---|---|
| Interest rates | Fixed or adjustable | Generally fixed with a home equity loan and variable with a home equity line of credit (HELOC) |
| Mortgage interest tax deduction | Deductible on up to $750,000 of combined mortgage debt (or $1 million if loan was obtained before Dec. 16, 2017) | Only deductible within $750,000 combined limit if mortgage debt was used to buy, build or make improvements to the property |
| Mortgage insurance | Required if down payment is less than 20% | Not required |
| Size of loan | Cost of the property minus the down payment | Based on available equity and other factors |
FAQ
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Mortgages allow their borrowers to qualify for a special tax deduction. On your tax return, you are allowed to deduct mortgage interest paid on the first $750,000 of debt if you’re a single filer, a married couple filing jointly, or a head of household. For married couples filing separately, you can deduct interest on the first $375,000 of debt.
Additionally, if you sell the home before the mortgage is paid off, the remaining balance will get deducted from the sales proceeds. This can impact your profit and the amount of capital gains tax, if any, you are required to pay.
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The loan-to-value (LTV) ratio on a mortgage is a percentage difference that represents the size of your loan divided by the appraised value of your property. Your LTV ratio is one of the factors that determines your interest rate and whether you get approved for the mortgage you’re applying for. For example, many lenders will not give you a sum that exceeds 80 percent of the home’s worth.
If you have multiple mortgages on your home, you also have a combined loan-to-value (CLTV) ratio, which represents all the home-secured loans you have in relation to the value of the property. The CLTV can impact how large a second mortgage you could take out, since many lenders will only let you borrow so much against your home’s worth. You can use Bankrate’s online LTV calculator to find the LTV or CLTV for your mortgage(s).
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Conventional mortgages have a conforming loan limit, which is determined by the Federal Housing Finance Agency (FHFA) based on current home prices. The conforming limit represents the largest loan size that lenders should give borrowers based on factors like their credit score and debt-to-income ratio. For 2024, the conforming loan limit is $766,550. Mortgages that exceed the conforming loan limit are considered jumbo loans, which are generally more difficult to qualify for.
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A primary lien on a home simply means that your home is being used as collateral to secure your mortgage. When you take out a mortgage, the lender places a lien on your home, which can be called a first mortgage lien, first lien, or primary lien. A primary lien allows the lender to take ownership of the home if you default on your loan.
Additional reporting by Elizabeth Rivelli
