What is a First Mortgage?

A first mortgage is a loan that empowers people to purchase a property. This name doesn’t refer to the very first mortgage a person takes out in their lifetime, which is a misconception that some people will have based on the name. 

A first mortgage is essentially just a mortgage. When someone says “mortgage,” they’re nearly always referring to the first mortgage on a property. The reason for this distinction is because there is also something called a second mortgage. If you’re wondering about the meaning of a first mortgage mean, then just think of it as a regular mortgage or the one that takes precedence over any subsequent mortgages on a property.

A mortgage is a lien on the property, which means the creditor has the legal right to sell the property should the residential investor not meet the obligations of the loan.

What does a first mortgage mean?

A first mortgage is the mortgage that gets paid back first in the event that the residential investor defaults on their payments and the investment property is sold on the real estate market. You can take out a second mortgage on a property, but if the mortgages don’t get paid and the bank has to foreclose on the property to sell it, then the first mortgage lender must be paid back in full before the lender of the second mortgage sees a penny of the proceeds from the property’s sale.

What are some first mortgage tips?

When you think of the phrase “first mortgage,” remember that it means “first in line.” In that same sense, a “second mortgage” means “second in line.” If you only have one mortgage on a property, then you can just think of it as a “mortgage.” The numbered prefixes come into play when you have more than one.

Interest paid towards a first mortgage can be tax deductible in certain situations, so this is worth discussing with your accountant or a tax attorney. One of the requirements to offset your taxable income using interest paid on a first mortgage is that you file your taxes with itemized expenses.

What is the difference between first and second mortgages?

The primary difference between a first and second mortgage is what happens in the event that the debtor doesn’t meet their contractual obligations. If the property is foreclosed on, then the creditor of the first mortgage must be paid back in full before the creditor of the second mortgage receives any compensation.

A first mortgage is used for nearly every property purchase unless someone is purchasing a property entirely in cash, which is very rare and generally not a great financial decision because they could put that cash to better use by investing it in other ways to earn a great return while carrying a mortgage at a lower rate.

Second mortgages can also be used as a tool to help fill in the gap when you aren’t able to make the full down payment. The second mortgage can be used as a replacement for a down payment in certain situations, which enables you to avoid having to purchase expensive private mortgage insurance.

The second mortgage on a property will often carry a higher interest rate than the first. These higher interest rates help protect the lenders who are second in line to collect payments in the event that the residential investor breaks their contract. A second mortgage loan can either be a property equity loan or a property equity line of credit. It depends on how the borrower decides to access the funds.

How do I get my first mortgage?

When you’re ready to buy an investment property, then there are some considerations and calculations you must make. Here is a quick overview of the process.

1. Determine your budget for buying property: How much can you afford to pay each month towards your mortgage? If you’re currently renting, then your monthly rent is a good starting point. However, remember there are many additional costs when it comes to residential investments. Costs include taxes, repairs, maintenance, and more.

2. Prepare your down payment: The required down payment can range from around 5% to 20% depending on the cost of the property and where you live.

3. Shop around for rates: Finding a slightly better mortgage rate can save you a small fortune in the long run. We’re here to help you find the best mortgage offers to suit your unique long-term financial goals and needs.

4. Get pre-approved for the loan: When you’re pre-approved for a mortgage, you can start the house-hunting process because you know how much your budget is based on the amount you can borrow. You’ll need to gather documents like tax returns, pay stubs and other proofs of income, bank statements, etc.

Can you have two first mortgages?

If you own multiple properties, then you’ll have a first mortgage for each of them. One person or business entity can have multiple mortgages. Look at landlords, for instance. A landlord who owns multiple properties will have multiple first mortgages.

If you take out an additional mortgage on a property that already has a first mortgage, then that is a second mortgage. There are even third mortgages, which take priority behind the first and second mortgages.

What are some final thoughts on first mortgages?

What is a first mortgage? You now understand that it’s almost always a requirement in the vast majority of cases for residential investors. Second mortgages are also sometimes used, but they serve a different purpose. You can also think of this as a first lien and a second lien. Your mortgage interest rates will vary depending on your financial history, the amount of your down payment, whether it’s a first or second, and more.

Your mortgage lender will be able to let you know exactly how much you’ll end up paying for your real estate, how much you’ll owe each month in payments, and to clear up any additional details of this lien.