First Mortgage

A first mortgage is simply the primary mortgage instrument used to purchase a piece of property. It’s common practice for a homeowner to have two mortgages, with the second mortgage being one taken out for home improvements, or to cover part of the down payment. In the event of a default on the part of the buyer, the holder of the first mortgage gets priority for repayment over all other voluntary liens.

A first mortgage typically carries a lower interest rate than a second, because the risk is lower. For example, suppose a homeowner has two mortgages for a $100,000 home, a first mortgage for $80,000 and a second mortgage for $25,000. The homeowner defaults on the loan, and the house is sold at auction for $95,000. The lender holding the first mortgage gets all of their $80,000 back, plus any additional interest and costs involved in the foreclosure process. The holder of the second mortgage gets what is left, losing $10,000 in the deal. The balance of the second mortgage, and any other voluntary liens, are wiped out; that is, assuming the holder of the first mortgage is the one foreclosing. The only other type of lien that would sometimes take priority over a first mortgage is an involuntary lien, such as a tax lien.

A first mortgage can take several different forms. It may be an FHA or VA loan, it may be a fixed rate or adjustable rate mortgage, or for a more expensive home, it could be a jumbo loan.

If a first mortgage is paid off or refinanced, an existing second mortgage would automatically fall into the position of first mortgage. If a first mortgage is being refinanced to take advantage of a lower interest rate, the second mortgage holder would typically have to sign an agreement to continue being subordinate to the new first mortgage being written.