when an individual wants to buy a property they may decide to finance the purchase with a loan from a lending institution called a mortgage 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 lien on the property because the loan is secured by the home this mortgage taken out by a homebuyer to purchase the home is known as the first mortgage 4
the first mortgage is the original loan taken out on a property the homebuyer could have multiple properties in their name however the original mortgages taken out to secure each of the properties comprise the first mortgage for example if a property owner takes out a mortgage for each of their three homes then each of the three mortgages is the first mortgage the loan to value ltv ratio on a home loan is a measure of the mortgage amount versus the appraised value of the home 5 if the ltv of a first mortgage is greater than 80 lenders generally require private mortgage insurance pmi in such a case it sometimes can be economical for a borrower to limit the size of the first mortgage to 80 ltv and use secondary financing to borrow the remaining amount needed 2the economics of paying pmi versus taking out a second loan largely depends on the rate at which a borrower expects the value of their home to increase pmi can be eliminated when the ltv of the first mortgage reaches 78 however a second lien which typically carries a higher interest rate than a first mortgage must be paid off this is usually accomplished by refinancing the first mortgage for an amount equal to the remaining balance of both the first and second mortgages 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 paid on the loan for the tax year however the mortgage interest tax deduction is only applicable to taxpayers who itemize expenses on their tax returns 3first mortgage requirementsfirst mortgage requirements can vary based on whether you re choosing a conventional loan or a government backed loan such as a federal housing administration fha u s department of agriculture usda or u s department of veterans affairs va loan these requirements can affect the type of property can also matter when getting a first mortgage fha loans for example allow you to purchase a one to four unit home with just 3 5 down and a credit score as low as 580 but the property itself must meet certain standards to qualify for the loan 6poor credit is not necessarily an absolute roadblock to getting a first mortgage but it can affect the loan terms that you qualify for and the interest rates that you pay first mortgage vs second mortgagethe 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 a first mortgage represents the primary debt owed on a property which serves as collateral for the loan a second mortgage is a junior lien that you take out against your home when you still have a first mortgage outstanding 7second mortgages are subordinate to first mortgages so if you sell the home for example any proceeds would go toward paying off the first mortgage then the second mortgage common examples of second mortgages include home equity loans and home equity lines of credit helocs you may take out one of these second mortgage loans if you wish to borrow against the accumulated equity in your home 7your ability to qualify for a second mortgage home equity loan or home equity line of credit heloc can depend on your credit scores income and how much equity you ve accrued in the home example of a first mortgagehere s an example of how a first mortgage loan works and what the addition of a second mortgage loan can mean assume a homebuyer secures a 250 000 first mortgage on a home property and after several years obtains a second mortgage for 30 000 on the same property the borrower defaults on his payments after he has already repaid 50 000 of the original loan amount and his property is foreclosed and sold to cover the loan given that the first mortgage is senior to the second mortgage if the proceeds from the sale of the property add up to 210 000 then the first mortgage lender will receive the balance owed which is 200 000 the second mortgage lender will then receive whatever is left in this case 10 000 and because a first mortgage is a primary claim that takes precedence over secondary claims second mortgages usually command higher interest rates than first mortgages do if you re struggling with mortgage payments then a loan modification short sale or deed in lieu of foreclosure are some of the options for managing first and second mortgage debt can i have two mortgages at the same time it s possible to have two mortgages at the same time a first mortgage can go toward purchasing a home either as a primary residence or as an investment property a second mortgage or home equity loan can go toward making upgrades or improvements to the property 