A first mortgage is the primary lien on a property. It is the primary loan that pays for the property and has priority over the other liens or have claims on the property in case of any default. It is the original loan on the property.
When an individual want 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 claim 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 term “first mortgage” leads one to understand that there could be other mortgages on a property. A homeowner 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 home equity to fund other projects and expenditures. However, the second mortgage and any other subsequent mortgages taken out on the same property are subordinate to the first mortgage. This means that the first mortgage is paid before the secondary mortgages are paid in the event of default.
The first mortgage holder does not get the ownership of the property; he only gets the lien on the same. The borrower is free to do whatever he wishes to do with the property but generally cannot transfer it without obtaining prior consent from the lender.
The borrower does not usually need the first mortgage lenders consent for obtaining the secondary mortgage. However, the secondary mortgage lender will always want an assurance that the borrower has enough equity in the property so that, in case of non-repayment or default, their interest is protected.
Taxes on a First Mortgage
The mortgage interest paid on a first mortgage is tax-deductible. This means that homeowners 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.
Why Would You Have More Than One Mortgage?
There are situations in which you might have multiple mortgage loans on a single property. These can occur either up-front, when you’re initially purchasing the home or down the line after you’ve been in the home for some time. This mainly happens when:
- Buying a new home
Some buyers use two mortgage loans to purchase their property. The first to cover the bulk of the purchase price of the home, minus a down payment. The second loan cover that down payment and the closing costs associated with the transaction. This strategy is called “piggybacking,” with the second mortgage being the “piggyback loan.”
- Tapping your home equity
If you ever take out a home equity loan on your property, then this will be considered a second mortgage as well. These loans allow you to tap the equity you have in your property to pay for renovations, medical bills, debts, or other expenses you might have. Home equity loans also result in having a second mortgage payment every month until the balance is paid off.
The major benefit of getting a first mortgage is to become a homeowner and have a place to call your own. There are financial advantages as well. Owning property is an investment, and the interest rates on home loans are lower than unsecured loans. Additionally, the mortgage interest is tax deductible, which is a big benefit for taxpayers who itemize. The major drawback of financing a home loan is that your ownership is tied to your ability to repay the debt. The bank maintains a lien on the property, allowing it to repossess or foreclose on the property if you don’t make payments.
The major benefit of a second mortgage relative to an unsecured loan is lower interest rate. The interest on a second mortgage is also normally tax deductible. The inherent risk of taking on another loan with your home as collateral is the risk that you won’t be able to repay the debt, thus, risking foreclosure. Also, adding additional monthly installments to those you already pay on a first mortgage can restrict your budget.