12 Apr What is the difference between a first and a second mortgage?
These two terms may sound like simple terms, but in reality they refer to specific points when it comes to mortgages. A first mortgage does not refer to the mortgage on the first house the buyer has purchased. A first mortgage designates the primary loan that pays for the property and it has priority over all other liens or claims on a property in the event of default. In other words, if the property is sold or if the borrower defaults, the first mortgage is paid before any other mortgage lien on the property. Usually, the loan used to purchase the property is secured by the first mortgage. You will also sign a mortgage, giving the lender a lien, or security on the property. In the event you do not pay back the loan, the lender, through the mortgage, is given the right to sell the property to complete repayment of the note. If there is more than one mortgage, the first mortgage is paid before any secondary mortgages are paid.
When a person wants to buy a property, they may decide to finance the purchase with a loan from a lending institution. The lender expects the home the mortgage to be repaid in monthly instalments which include a portion of the principal and interest payments. The lender will have a lien 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 home owner could take out another mortgage, such as a second mortgage, while the original and first mortgage is still in effect. A second mortgage is a common way of financing when the property owner has available equity in the property. A second mortgage can either be a home equity line of credit or a private mortgage. In both cases the property owner’s home is used as security and in the event of default, the first mortgage will be paid before the second mortgage.
When considering a second mortgage, the potential buyer should consider the equity in the property. If there is no equity in the property the buyer is unlikely to be approved for a second mortgage. Another thing the borrower should consider is whether a second mortgage payment is within their monthly budget. A second mortgage that the borrower cannot pay can place the entire property at risk.