First Mortgage

What Is a First Mortgage?

A first mortgage is a primary lien on a property. As the primary loan that pays for a property, it has priority over all other liens or claims on a property in the event of default. A first mortgage is not the mortgage on a borrower’s first home; it is the original mortgage taken on any one property. It is also called a first lien. If the home is refinanced, then the refinanced mortgage assumes the first mortgage position.

Key Takeaways

  • A first mortgage is a primary lien on the property that secures the mortgage.
  • The second mortgage is money borrowed against home equity to fund other projects and expenditures.
  • If the loan-to-value (LTV) ratio of a first mortgage is greater than 80%, lenders generally require private mortgage insurance (PMI).
  • The mortgage interest paid on a first mortgage is tax deductible, only applicable to taxpayers who itemize expenses on their tax returns.

Understanding First Mortgages

When an individual wants to buy a property, they may decide to finance the purchase with a loan from a lending institution called a mortgage. 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 will have a lien on the property because the loan is secured by the home. 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. The homebuyer could have multiple properties in their name; however, the original mortgages taken out to secure each of the properties 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.

First mortgage and loan-to-value (LTV)

The loan-to-value (LTV) ratio on a home loan is a measure of the mortgage amount versus the appraised value of the home. 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.

The economics of paying PMI versus taking out a second loan largely depends on the rate at which a borrower expects the value of their home to increase. PMI can be eliminated when the LTV of the first mortgage reaches 78%. However, a second lien, which typically carries a higher interest rate than a first mortgage, must be paid off. This is usually accomplished by refinancing the first mortgage for an amount equal to the remaining balance of both the first and second mortgages.

Taxes on a first mortgage

The mortgage interest paid on a first mortgage is tax deductible. This means that 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.

First Mortgage Requirements

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 that you qualify for and the interest rates that you pay.

First Mortgage vs. Second Mortgage

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 that you take out against your home when you still have a first mortgage outstanding.

Second mortgages are subordinate to first mortgages. So if you sell the home, for example, any proceeds would go toward paying off the first mortgage, then the second mortgage. Common examples of second mortgages include home equity loans and home equity lines of credit (HELOCs). You may take out one of these second mortgage loans if you wish to borrow against the accumulated equity in your home.

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

Note

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.

Example of a First Mortgage

Here's an example of how a first mortgage loan works and what the addition of 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 he has already repaid $50,000 of the original loan amount, and his 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.

Tip

If you’re struggling with mortgage payments, then a loan modification, short sale, or deed in lieu of foreclosure are some of the options for managing first and second mortgage debt.

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, either as a primary residence or as an investment property. A second mortgage or home equity loan can go toward making upgrades or improvements to 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 is unable to keep up with both 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 you 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, then you may want to reconsider a second mortgage loan.

The Bottom Line

First mortgage loans make it possible for homebuyers to purchase homes, and they take priority over any subsequent second mortgages that may be associated with the property. When applying for a first mortgage, it's important to understand the requirements to buy a house and what lenders are seeking. It's also helpful to shop around to compare mortgage rates in order to find the best possible deal on a home loan.

Article Sources

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  1. FDIC. "First Lien Mortgage Products."

  2. Consumer Financial Protection Bureau. “What Is Private Mortgage Insurance?

  3. Internal Revenue Service. “Publication 936 (2019), Home Mortgage Insurance Deduction.”

  4. Consumer Financial Protection Bureau. "What is a mortgage?"

  5. Consumer Financial Protection Bureau. "What is a loan-to-value ratio and how does it relate to my costs?"

  6. U.S. Department of Housing and Urban Development. “Let FHA Loans Help You.”

  7. Consumer Financial Protection Bureau. “What Is a Second Mortgage Loan or “Junior-Lien”?