Definition
A first mortgage refers to the primary loan that covers most of the value of the property. It has priority over all other liens or claims on a property in the event of default. If the borrower defaults, the holder of the first mortgage will be the first to be repaid from the proceeds of the property’s sale.
Key Takeaways
- A first mortgage is a lien on a property which has priority over all other liens or claims on a property in case of a default. It is the primary loan that covers most of the price of a property.
- The first mortgage has lower risk for the lender, hence, has lower interest rates as compared to other types of loans or secondary mortgages. They help individuals acquire real estate and are generally used for buying a home.
- First mortgage is paid off first in the case of foreclosure or selling of the property. Only after paying off the first mortgage, the funds will go towards paying off any subsequent loans such as second or third mortgages.
Importance
The term “First Mortgage” holds significant importance in finance as it refers to the primary lien on a property.
This type of mortgage holds priority over all other liens or claims on a property in the event of default.
If the borrower fails to fulfill the repayment obligations, the holder of the first mortgage has the right to seize and sell the property first to recover the debt.
Therefore, this results in less risk for the lender associated with the first mortgage as they have the foremost claim to the property’s assets.
For homeowners, understanding the concept of a first mortgage is important because it impacts their rights, the financing options available to them, and how their property can be used as collateral.
Explanation
A first mortgage serves as the primary lien or claim on a property. In the event of default, the first mortgage gets priority over all other liens or claims on a property, including second mortgages.
The purpose of the first mortgage is to provide security to the lender, so they will have first access to the property’s value if the borrower defaults on the loan. It offers the borrower to secure money without selling up that they can use to invest in a property which, over time with constant loan payments, will eventually become a full asset to them.
The primary usage of a first mortgage, typically, is for the purchase of a real estate property, be it residential or commercial. The money borrowed is used to pay for the property, with the property itself serving as collateral for the loan.
In turn, the borrower repays the loan amount along with interest in set periodic payments. In a scenario where the borrower should fail to meet up with the payment terms, the lender can enforce the first mortgage to claim back their money by a legal process known as foreclosure.
Examples of First Mortgage
Home Purchase: The most common example of a first mortgage is when an individual or a family buys their first home. Mostly, they don’t have the wealth to pay for the house in cash, so they take out a loan from a bank or a mortgage lender. This loan is then secured by the property. If the borrower fails to pay back the loan, the lending institution has the right to seize the property or house. This loan is called a first mortgage.
Commercial Property: If a business owes money to a bank or other lender and uses a commercial property as collateral, that’s a first mortgage. The business is the mortgagor, and they promise to repay the loan. If the business defaults, the lender can take control of the commercial property.
Refinancing: Another example of applying a first mortgage is refinancing an existing home loan. When a homeowner chooses to refinance, they are getting a new loan to replace the original. Once the refinance process is complete, the new loan is now considers the “first” mortgage, because it is the primary loan that is secured by the house.
First Mortgage FAQ
What is a First Mortgage?
A first mortgage is the primary lien on the property that secures the mortgage. The first mortgage has priority over all other claims or liens on a property in the event of default.
How does a First Mortgage work?
A first mortgage is the primary loan that covers the cost of the home. It provides the primary security for the loan and has priority in case of sale or property liquidation.
What are the qualifications for a First Mortgage?
To qualify for a first mortgage, you need a good credit score, a stable income, and a down payment. The actual requirements vary by lender and the type of mortgage.
What are the advantages of a First Mortgage?
A first mortgage typically has a lower interest rate than other kinds of loans. It is also easier to get approved for a first mortgage compared with other types of loans.
Can I have more than one First Mortgage?
Generally, one property can only have one first mortgage. If you own more than one property, each property can have its own first mortgage.
Related Entrepreneurship Terms
- Loan-to-Value Ratio (LTV)
- Principal
- Private Mortgage Insurance (PMI)
- Amortization
- Foreclosure
Sources for More Information
- Investopedia: A comprehensive resource for understanding finance and investment terminology.
- Bankrate: A reliable source for personalized mortgage rates, comparing loans, and other financial tools and advice.
- Consumer Financial Protection Bureau (CFPB): This U.S. government agency makes sure banks, lenders, and other financial companies treat you fairly.
- NerdWallet: Provides clarity for all of life’s financial decisions, including mortgages.
