What Is a First Mortgage & Which One Is Right For Me?
For most people, buying a home means getting a mortgage to pay for the property. A mortgage is a type of loan that is issued over the long-term to allow people to purchase a home by making monthly payments. This means people with good credit and a secure income can buy a home without having to have the entire cost of the home upfront. If you are buying a home, it means you will most likely get a first mortgage. Let’s find out what that is.
What Is a First Mortgage?
A first mortgage is the mortgage that is used to buy a property, whether that is a new construction home, a resale home, land, or another type of property. When you get a first mortgage, your lender will put what is known as a primary or senior lien on your property.
This means that if you default on your mortgage and can no longer make the required payments, they have the right to seize the property and get the proceeds from the sale of that property. The exception to this is if you owe property taxes. Those will be paid from the proceeds of the sale first, and the lender will get what’s leftover.
The Difference Between a First Mortgage and Second Mortgage
While the first mortgage is the mortgage that is used to buy a property, a second mortgage is a loan that is given to a homeowner who refinances their home, such as by taking out a home equity loan or a home equity line of credit. These can be used to do things like pay down debt, pay college tuition, or pay for a major renovation to your home. The second mortgage typically comes with a higher interest rate because it comes with higher risk, and it may not be eligible for mortgage interest rate tax deductions.
A second mortgage can also be taken out at the same time the first mortgage is taken out. While the first mortgage covers the cost to purchase a home, the second mortgage can be used to cover the closing costs and moving costs and even to top up a down payment to 20%. When a second mortgage is used like this, it is often referred to as a piggyback mortgage.
The lender for the second mortgage will put a junior lien on the home, meaning they are second in line to get any proceeds that are left over, should you default on your mortgage. They only get proceeds from the sale of the home after the primary lender has received theirs, which is the primary difference between these two types of loans.
Example of a First Mortgage and Second Mortgage
Say you are buying a home for $300,000 and you have a down payment of $30,000 or 10% of the cost of the home. You would then need a loan for $270,000 to pay the remaining cost of the home. This would be the first mortgage on your home, and it is the primary lien on the property. It is this loan that will always be paid down first.
Now, say you wanted to put a $60,000 down payment on the home, which equals 20% of the purchase price. You can get a first mortgage of $240,000 and then a second mortgage of $30,000 to add to the $30,000 you already have.
Keep in mind that if you choose to take out a second mortgage on your home for whatever reason, you will then have two mortgage payments each month. And this second mortgage will come with its own set of closing costs and legal fees.
Deciding What Type of Mortgage You Need
If you are buying a home, chances are you will need a first mortgage. The size of that first mortgage will depend on how much you have for a down payment. You may not need a second mortgage, and in the beginning, you may not even qualify for one.
After a few years of paying down your first mortgage, you will most likely have equity built up in your home. At this time, you may want to take out a second mortgage, so you have the extra cash you need to do some of the things you’ve always wanted to do, whether that is home renovations, putting aside a retirement or emergency fund, or something else.
Speak with one of our experienced team members today to learn more about what a first mortgage is and how to get one.
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