First Mortgage

What is 'First Mortgage'

A first mortgage is the primary lien on the property that secures the mortgage. A first mortgage is the primary loan that pays for the property and 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.

Also called First Lien.

BREAKING DOWN 'First Mortgage'

When an individual wants to buy a property, they may decide to finance the purchase with a loan from a lending institution. 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 since 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 his or her name; however, it is the original mortgages taken out to secure each of the properties that constitutes a first mortgage. For example, if a property owner takes out a mortgage for each of his three homes, each of the three mortgages is a first mortgage.

The term ‘first mortgage’ leads one to understand that there could be other mortgages on a property. A home owner could take out another mortgage, such as a second mortgage, while the original and first mortgage is still in effect. The second mortgage is money borrowed against a home equity to fund other projects and expenditures. However, the second mortgage and any other subsequent mortgages taken out on the same property is subordinate to the first mortgage. This means that the first mortgage is paid before the secondary mortgages are paid.

For example, if a homebuyer secures a $250,000 first mortgage on a home property, and after several years gets a second mortgage for $30,000 on the same property, the first mortgage is senior to the second mortgage. 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. If the proceeds from the sale of the property sums up to $210,000, the first mortgage lender will receive the balance owed, that is $200,000. The second mortgage lender will receive whatever is left, which in this case is $10,000. Because a first mortgage is the primary claim that takes precedence over secondary claims, second mortgages usually command higher interest rates than first mortgages.

If the loan-to-value (LTV) ratio of a first mortgage is greater than 80%, lenders generally require private mortgage insurance (PMI). In such a case, it can sometimes 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 using a second loan largely depends on the rate at which a borrower expects the value of his or her 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, most likely through a refinancing of the first mortgage for an amount equal to the remaining balance of the both the first and second mortgages.

The mortgage interest paid on a first mortgage is tax deductible. This means that home owners can reduce their taxable income by the amount of interest that has been paid on the loan for the tax year. However the mortgage interest tax deduction is only applicable to taxpayers that itemize expenses on their tax returns.