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Key Takeaways
- A first mortgage is the primary lien on a property and takes precedence over all other claims.
- Refinancing can replace the original first mortgage if the home is refinanced.
- Lenders typically require private mortgage insurance if the loan-to-value ratio exceeds 80%.
- The interest on a first mortgage can be tax-deductible for itemizing taxpayers.
- Secondary mortgages, like home equity loans, are subordinate to the first mortgage and often have higher interest rates.
What Is a First Mortgage?
A first mortgage is the original mortgage on a property, the primary lien, so it gets paid first if there’s a default, even after a refinance (the new loan takes that first-lien spot). A second mortgage is an additional loan behind it, often with different requirements and possible tax differences, and choices like down payment/credit score affect LTV, rate, and whether PMI applies.
How First Mortgages Work
When a consumer wants to buy a property, they may decide to finance the purchase with a mortgage loan from a lending institution. This involves applying for a home loan with the mortgage lender, getting approval, and signing the documents.
When a first mortgage is granted, the lender expects the home loan or mortgage to be repaid in monthly installments, which include a portion of the principal and interest payments. The lender takes out a lien on the property because the home secures the loan. This mortgage taken out by a homebuyer to purchase the home is known as the first mortgage.
The first mortgage is the original loan taken out on a property. It is not the very first mortgage taken in their name. The homebuyer could have multiple properties in their name. However, the original mortgages taken out to secure each property comprise the first mortgage. For example, if a property owner takes out a mortgage for each of their three homes, then each of the three mortgages is the first mortgage.
The mortgage interest paid on a first mortgage is tax deductible, meaning homeowners can reduce their taxable income by the amount of interest paid on the loan for the tax year. However, the mortgage interest tax deduction is only applicable to taxpayers who itemize expenses on their tax returns.
Essential Requirements for a First Mortgage
First mortgage requirements can vary based on whether you’re choosing a conventional loan or a government-backed loan, such as a Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or U.S. Department of Veterans Affairs (VA) loan.
These requirements can affect:
- Minimum credit score needed to qualify
- Down payment amounts
- Closing costs and what percentage of the closing cost can be paid by the seller
- Loan repayment terms
- Interest rates
The type of property can also matter when getting a first mortgage. FHA loans, for example, allow you to purchase a one- to four-unit home with just 3.5% down and a credit score as low as 580. But, the property itself must meet certain standards to qualify for the loan.
Important
Poor credit is not necessarily an absolute roadblock to getting a first mortgage, but it can affect the loan terms you qualify for and the interest rates you pay.
Understanding Loan-to-Value (LTV) in First Mortgages
The loan-to-value (LTV) ratio on a home loan measures the mortgage amount versus the home’s appraised value. If the LTV of a first mortgage is greater than 80%, lenders generally require private mortgage insurance (PMI). In such a case, it sometimes can be economical for a borrower to limit the size of the first mortgage to 80% LTV and use secondary financing to borrow the remaining amount needed.
Whether to pay PMI or take a second loan depends on how much the home value is expected to rise. PMI can stop once the first mortgage LTV hits 78%. Second liens, with higher interest rates, are often paid by refinancing the first mortgage for the combined balance.
Comparing First and Second Mortgages
The term first mortgage leads one to understand that there could be other mortgages on a property. A homeowner could take out another mortgage, such as a second mortgage, while the original and first mortgage is still in effect.
A first mortgage represents the primary debt owed on a property, which serves as collateral for the loan. A second mortgage is a junior lien against your home when you still have an outstanding first mortgage.
Second mortgages come after first mortgages in priority, meaning sale proceeds first pay off the first mortgage. Examples include home equity loans and HELOCs, used for borrowing against home equity.
| First Mortgage vs. Second Mortgage | |
|---|---|
| First Mortgage | Second Mortgage |
| May have fixed or variable rates | Home equity loans often have fixed rates, while home equity lines of credit (HELOCs) tend to have variable rates |
| Home serves as collateral for the loan | Home serves as collateral for the loan |
| Primary lien, meaning lienholders get paid first | Secondary lien, meaning lienholders are paid after primary lienholders |
| Loan limits are determined by the type of loan and borrower eligibility | Loan limits may range from 75% to 100% of the equity in the home |
| Subject to private mortgage insurance (PMI), depending on the loan type and down payment | PMI doesn’t generally apply, though taking out a home equity loan or a HELOC might affect PMI requirements on a first mortgage |
Fast Fact
Your ability to qualify for a second mortgage home equity loan or home equity line of credit (HELOC) can depend on your credit scores, income, and how much equity you’ve accrued in the home.
Real-World Example of a First Mortgage
Here’s an example of how a first mortgage loan works and what adding a second mortgage loan can mean. Assume a homebuyer secures a $250,000 first mortgage on a home property and, after several years, obtains a second mortgage for $30,000 on the same property.
The borrower defaults on his payments after they have already repaid $50,000 of the original loan amount, and their property is foreclosed and sold to cover the loan. Given that the first mortgage is senior to the second mortgage, if the proceeds from the sale of the property add up to $210,000, then the first mortgage lender will receive the balance owed, which is $200,000.
The second mortgage lender will then receive whatever is left—in this case, $10,000. And because a first mortgage is a primary claim that takes precedence over secondary claims, second mortgages usually command higher interest rates than first mortgages do.
Can I Have Two Mortgages at the Same Time?
It’s possible to have two mortgages at the same time. A first mortgage can go toward purchasing a home as a primary residence or investment property. A second mortgage or home equity loan can go toward upgrading or improving the property.
Is a Second Mortgage Superior to a First Mortgage?
First mortgages take precedence over second mortgages for repayment if the borrower defaults. This means that second mortgages are subordinate, not superior, to first mortgages on a home.
What Is the Downside to a Second Mortgage?
Second mortgages increase a homeowner’s monthly financial obligations. They can also increase the risk of default if the homeowner cannot keep up with the first and second mortgage payments.
Is Taking Out a Second Mortgage a Good Idea?
Taking out a second mortgage could be a good idea if you’ve researched borrowing options and understand what you can afford to repay. If, however, your income is unstable or you lack sufficient emergency savings to cover mortgage payments if you lose your job or become ill and can’t work, you may want to reconsider a second mortgage loan.
The Bottom Line
A first mortgage is the original mortgage on a property (not your first home), and it has priority over any second mortgage, which can tap equity but is subordinate. Approval and cost depend on credit score, down payment, and property type; LTV above 80% may require PMI, interest may be deductible if you itemize, and it’s smart to compare rates and consider whether you can handle added debt.
