Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Understanding First Mortgage
When a person wants to buy a property, he may choose to finance the purchase with a loan from a lending institution.
The home loan or mortgage needs to be repaid in monthly installments to the lender along with a portion of the principal and interest payments.
Since the loan is secured by the home, the lender will have a lien on the property. When a homebuyer takes out this mortgage to purchase the home it is known as the first mortgage.
What is a First Mortgage?
The primary loan on a property is called the first mortgage. In the event of default, a first mortgage has priority over any other claim on the property’s title.
When a home is refinanced, then the refinanced mortgage maintains the first mortgage position
A first mortgage is a primary or initial loan that you obtain on your piece of real estate. Should you as the borrower default then the primary-mortgage lender has the first lien or right on the property.
He will foreclose the property, and then sell it to recover its investment. First mortgages are very different from second mortgages, where the loan is taken out against the available equity.
Should the borrower stop making payments or otherwise not follow the terms of the contract then the mortgage liens or legally binding contract allows the lender to stake a claim on the property.
And the primary mortgage lender (because it is the first lien) would be first paid from the proceeds of a foreclosure auction. And lenders of home equity loans or lines of credit would be the secondary mortgage lender.
For example, if you buy a home with a $200,000 mortgage. It would be your first mortgage on the property.
Over the next few years, you pay down your mortgage. and owe $110,000 on the first mortgage.
Meanwhile, you want to do some remodeling, and repair work for your home so you take out a home equity loan for $20,000. This then would be a second mortgage.
If for some reason you stop making your house payments, then your first mortgage lender would force a sale of the house to recoup his $110,000 before the second lender is entitled to try to recover his $20,000.
Now we know that a first mortgage is an original loan taken out on your property.
Now the possibility is that the homebuyer could have multiple properties in his name; so in such case, it is the original mortgage that is considered as the first mortgage, which is taken out to secure each of the properties that constitute the first mortgage.
For example, if you take out a mortgage for each of your three homes, each of the three mortgages is the first mortgage.
When we use the term “first mortgage” we understand that there could be other mortgages on a property.
While the original and first mortgage is still in effect, a homeowner could take out another mortgage which is called a second mortgage or junior lien.
In the second mortgage, money is borrowed to fund other projects and expenditures against your home equity.
Since the second or subsequent mortgages are taken out on the same property they are subordinate to the first mortgage.
First Mortgage and Loan-to-Value (LTV)
Lenders generally require private mortgage insurance when the loan-to-value (LTV) ratio of a first mortgage is greater than 80%.
So it is beneficial and economical for you as a borrower to limit the size of the first mortgage to 80% LTV and use secondary financing to borrow the remaining amount needed.
Depending on the rate at which you expect the value of your home to increase you can identify if it is worth paying PMI or using a second loan.
When the LTV of the first mortgage reaches 78% PMI can be eliminated. It is also economical to pay off the second lien, which typically carries a higher interest rate than a first mortgage.
You can refinance the first mortgage for an amount equal to the remaining balance of both the first and second mortgages.
Taxes on a First Mortgage
When you pay the mortgage interest on your first mortgage then it is tax-deductible. By the amount of interest that has been paid on the loan for the tax year, a homeowner can reduce their taxable income.
However, only taxpayers who itemize expenses on their tax returns will benefit from the mortgage interest tax deduction.
Conclusion
Since you will be paying back a lot more than you originally borrowed so you will obviously be carrying an enormous debt over a long period of time.
And since it is a secured loan against your property keep up with your repayments so you don’t lose your home.
Like the unexpected credit crunch and job loss during the covid times a home is a place to be secure and safe for you and your family and also gives you an opportunity of working from home so make a wise decision as not to put the safety of your home under jeopardy.
