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First Mortgage

Updated on June 5, 2024
Article byRutan Bhattacharyya
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

First Mortgage Definition

A first mortgage or first lien is the initial loan acquired for a property. The main purpose of getting a first lien is to finance the purchase of a home. Borrowers keep the property as collateral for obtaining the loan.

First Mortgage

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The primary lien gives the first lender the first right to claim the house via foreclosure and sell it to recover the amount of debt if the borrower defaults on the loan. If a person refinances a home, the refinanced mortgage takes up the first lien position. A first lien carries a lower risk for lenders than other mortgages.  

Key Takeaways

  • The First mortgage is the original or primary loan obtained by borrowers on a property. It helps individuals finance the purchase of a new home if they do not have sufficient funds.
  • First mortgage rates can be fixed or variable. Moreover, the mortgage interest rate is subject to a tax deduction.
  • The main difference between first and second mortgages is that the former is the first loan taken on a property, while the latter is the loan taken in addition to the former.
  • The first lien provider has the first right to start foreclosure proceedings if a borrower defaults.

First Mortgage Explained

The first mortgage means the primary lien on a property securing the mortgage. This is a loan taken by an individual to finance the purchase of a property by keeping it as collateral. This collateral acts as an assurance to the lender. If a borrower fails to repay the loan, the lender can initiate foreclosure proceedings to sell the collateral and recover the unpaid amount with interest.

Depending on the type of first lien individuals get, they will likely pay a percentage of the property’s cost upfront as a down payment. Following that, they must repay the loan via monthly payments. The monthly installments comprise a portion of the borrowed amount, i.e., the principal and interest.

There can be multiple mortgages on a property. They can occur upfront when an individual buys a home. Alternatively, one can opt for a second mortgage, for example, a home equity loan a few years after they have lived in their new home for some time. The first lien helps one cover the home’s purchase price, while the second mortgage can cover the home improvement costs.

In such a scenario, the first and second mortgages assume a ‘senior’ lien and a ‘junior’ lien position, respectively, where the former takes priority over the latter. In other words, if the borrower defaults, the first lender has the first right to claim the proceeds from a foreclosure sale. The second loan provider can collect the remaining proceeds if any. This priority chain continues if there are more mortgages on a property.

Individuals must remember that the first lien is not the mortgage on a borrower’s first home. Instead, it is the initial mortgage taken on a property. In other words, if any homebuyer avails of loans for each of the three properties. Then, each mortgage will be the first lien.

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Examples

Let us look at a few first lien examples to understand the concept better.

Example #1

Suppose Jason purchases a home priced at $200,000, securing a $150,000 first mortgage on the property. After several years, his home is worth $240,000. He has already paid down the balance of the mortgage to $80,000. He decides to make a few improvements to the house and avails of a home equity loan of $30,000. This is the second mortgage.

He defaults on his payments and fails to devise a solution with the lender. As a result, the first lender can now initiate foreclosure proceedings to recover the losses.

Let us say the first lender sells the home at an auction for $240,000. They can recover the $80,000 owed by Jason. Also, the second lender can recoup $30,000. Suppose the home were to sell for 100,000. The first lender would have received the entire amount, and the second loan provider would not receive anything.

Example #2

New first mortgage deals launched in June 2022 under the government-backed loan equity scheme will help homebuyers to purchase a home tailored to their specific needs with a small deposit amount.

This scheme is available in England only. It provides self or custom home builders with an equity loan of anywhere between 5% and 20%. However, they must have a minimum deposit of 5%. A self-build mortgage availed from a lender offered by the scheme must fund the remaining 95%. This and the other mortgages under the scheme are available on an interest-only basis for the build period. That said, after the work is complete, it will turn into a repayment deal.

The new deals will eliminate barriers to homeownership, generate employment and help the construction industry, per Stuart Andrew, the former housing minister.

First Mortgage vs Second Mortgage

First and second mortgages have two things in common — both help borrowers finance the purchase of a new home, and the home serves as collateral in both cases. However, there are some crucial differences between the two concepts.

Homebuyers must have a clear idea of their distinct characteristics. So, let us look at them.

Basis of Comparison First Mortgage Second Mortgage
Interest RatesFirst mortgage rates are of two types — fixed and floating.The interest rate on home equity loans is fixed, while the home equity lines of credit usually have variable rates.
Loan LimitThe borrower’s eligibility and type of loan determine the loan limit.The loan limit can range from 75%-100% of the home’s value.
Private Mortgage Insurance or PMI RequirementsIt is subject to PMI, depending on the down payment and type of loan.Usually, it is not subject to PMI. That said, availing of a home equity loan or a home equity line of credit can impact PMI requirements on the first lien.
Mortgage-Interest Tax DeductionInterest paid on it is tax-deductible.The interest paid on a second mortgage might not be subject to a tax deduction.

Frequently Asked Questions (FAQs)

1. When first mortgage payment due?

Typically, individuals have to pay it at the beginning of a new month after living in their new home for a minimum of 30 days. Thus, if the loan’s closing date is September 15, the first payment will be due on November 1.

2. How to pay first mortgage payment?

One of the best ways to make mortgage payments is to set up an automatic payment via the mortgage servicer’s or bank’s official website. Alternatively, one can personally make the mortgage payments at the local branch. Moreover, various mobile-based applications allow individuals to make mortgage payments from the comfort of their homes.

3. Is first mortgage payment higher?

Typically, the first lien payment after closing a loan will not be the same as the regular monthly payments one has to make in the future. One must remember that the calculation of monthly payments depends on three things — loan tenure, loan amount, and the interest rate.

4. Can you delay first mortgage payment?

Individuals can delay the payment. However, the cost of borrowing will increase.

This article has been a guide to First Mortgage and its definition. Here, we explain the concept with examples and compare it with the second mortgage. You can also go through our recommended articles on corporate finance –

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