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What is a First Mortgage?
A primary or initial loan obtained for a property is termed a first mortgage. A primary lien on the property is placed by the lender who funded the mortgage to buy a home.
If in case of default in payment this lien gives the lender the first right or claim on the home.
How does a First Mortgage Work?
Depending on the type of mortgage, you’ll need to pay upfront, a percentage of its cost as a down payment.
Then, regular monthly payments comprising of a portion of the principal and interest, homeowners insurance, and property taxes all need to be paid till the life of the loan.
The first mortgage takes priority over any junior lien or second mortgage, attached to the property.
So in case of default in payment, your first mortgage lender would have the first claim to the proceeds from the foreclosure sale.
Then second mortgage lender can claim from the remaining proceeds. If you have multiple liens then this chain of priority continues.
However the pending property taxes will be repaid first before other claims, and if the borrower is filing for bankruptcy, then the court decides on the precedence of claims.
How is a First Mortgage Different from a Second Mortgage?
Both first and second mortgages have the property itself as collateral.
The main difference being the first mortgage is used to buy the property, whereas a second mortgage can be used for many reasons like renovation, college fees, consolidating debts or healthcare costs, a vacation, or various other expenses.
Sometimes a second mortgage is used to cover the down payment and closing costs.
Second mortgages usually have higher interest rates compared to first mortgages.
Home equity loans, and (HELOCs) are the two most common types of second mortgages.
Reference Source: Bankrate
