First mortgage loans are secured by property and have primary claim in the event of default. Lenders offer lower interest rates on first mortgages and borrowers can use them to purchase or refinance properties. Refinancing requires paying off all other liens and borrowers can choose between fixed or variable rates.
First mortgage loans are loans secured by residential or commercial property that is in the first lien position on the property being financed. Laws in many places allow borrowers to get two or three loans on the same property, but the first borrower has the primary claim on the property in the event of a borrower’s default. Borrowers can use mortgages to purchase or refinance properties. Mortgage lenders offer much lower interest rates on first mortgage loans than second or third lien loans.
When a lender writes a loan secured by a property, the lender can take control of that property if the borrower defaults on the loan. Lenders sell seized property from delinquent borrowers and use the proceeds to pay off the debt. Due to the danger of a property losing value over time, most lenders do not allow borrowers to establish first mortgage loans that are equal to 100 percent of the property’s value. Borrowers purchasing property must cover the remainder of the purchase price with separate funds or take out a concurrent second mortgage to cover the remainder of the purchase price.
Homeowners can pay off existing first mortgage loans, as well as other debts secured by a particular property, by obtaining a refinancing loan. For the new mortgage to be in first lien position, all other liens must be paid from the proceeds of the refinance loan. Any remaining liens on the home that predate the refinance mortgage will take up the first lien after the refinance occurs. Borrowers with existing second liens can only leave those loans in place and establish a new first lien mortgage if the current second lien holder signs a subordination agreement. A subordination agreement allows a newly written loan to move into the first lien position on a property before existing liens.
Lenders allow borrowers to take out fixed-rate and variable-rate first mortgages. Fixed-rate loan terms generally range from 10 to 30 years. Variable rate loans have rates that adjust throughout the life of the loan or begin with an introductory period, during which the borrower pays a variable rate of interest only, and a second phase in which the borrower makes principal and interest payments . Lenders generally do not allow borrowers to place second liens behind variable rate first liens because of the potential for rising interest rates to deplete homeowners’ equity over time.
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