What Is a First Mortgage?

Definition and Examples of a First Mortgage

Man and woman hanging a foreclosure sign on the front of a house
•••

Big Stock Photo

A first mortgage is the primary loan on a property. The original loan is referred to as the “first mortgage” or “first lien” when a piece of real estate is financed by multiple mortgage loans. The first lender has the first right to claim the home through foreclosure and sell it to collect on the mortgage debt in the event that the borrower defaults on the mortgage.

A new or subsequent loan is the “second mortgage,” “second lien,” or “subordinate loan.”

A first mortgage does not refer to a mortgage on the first home a buyer has purchased.

What Is a First Mortgage?

As an example, let's say that you bought a home in 2018 with a first mortgage in the amount of $200,000. You wanted to remodel your kitchen in 2019, so you took out a home equity loan to pay for the work. The mortgage with which you purchased the property is your first mortgage, and the home equity loan is effectively in second place.

Now fast-forward to mid-2020. You've hit some rough financial times and you’re three months behind on payments for both loans. The first mortgage lender begins the foreclosure process and ultimately sells the property for $150,000.

The first mortgage lender uses that $150,000 to pay off your original loan, which has a remaining balance of $130,000 after the payments you've made over the years. The remaining proceeds—$20,000—would go to the lender on the second loan after the first mortgage is paid off.

This might or might not cover the full remaining balance on the second lien, but the home equity lender would have little in the way of recourse because it held the second mortgage and was in line behind the first mortgage for payment.

  • Alternate name: First lien

How Does a First Mortgage Work?

You might have a first mortgage and additional mortgage loan on a single property for two common reasons. Multiple mortgages can occur either upfront, when you’re initially purchasing the home, or down the line after you’ve been living there for some time, as in the example of the home equity loan.

Some buyers use two mortgage loans to purchase their property. The first mortgage is used to cover the bulk of the purchase price of the home, minus a down payment. The second loan helps to cover the down payment and the closing costs associated with the transaction.

This strategy is sometimes called “piggybacking.” The second mortgage would be the piggyback loan, sometimes referred to as a combo loan.

Piggyback Loan Pros
  • Lower out-of-pocket costs up front

  • Can help buyers avoid private mortgage insurance

Piggyback Loan Cons
  • Two monthly mortgage payments

  • Two mortgage applications

  • Higher interest rates

Home equity second mortgages allow you to tap into the equity in your property to pay for renovations, medical bills, debts, or any other expenses you might have.

Both home equity loans and piggyback loans are second mortgages and they result in having to make a second mortgage payment every month until the balances are paid off.

First Mortgages vs. Second Mortgages

The biggest difference between a first and second mortgage is first claim to the property in the event of default. The first lender can foreclose on the property and use the returns to pay off your loan if you don’t make your payments. The second lender can only claim any portion of the returns after the first loan is paid off. 

Second mortgages typically have higher interest rates than first liens for this reason. They present more of a risk to the lender because the first lender has the right to claim the property if you don’t make your payments. It's possible that the second lender won't receive anything from the sale at all. The second lender has to protect itself, and the higher interest rate is part of that.

First Mortgage
  • Has the first claim to the property in case of default

  • Is eligible for the mortgage interest tax deduction

Second Mortgage
  • Higher interest rates

  • Doesn't have the first claim to the property in the event of default

  • Might not be eligible for the mortgage interest tax deduction

Another big difference between first and second mortgages is the availability of the federal mortgage interest tax deduction. You can deduct the interest you pay on your first loan up to certain limits, but interest on home equity and second mortgages isn't eligible for this write-off unless you use the money to “buy, build, or substantially improve” the home, according to the IRS.

Key Takeaways

  • A first mortgage is the primary and original lien against a property.
  • A first mortgage can be the only loan or mortgage, or it can be one of two or more liens against the property.
  • A first mortgage lender has the first right to claim the property and foreclose should the borrower default on payments or other loan terms.
  • The first mortgage lender is paid first from foreclosure proceeds when the property is sold. Second and other mortgage holders receive only what’s left over, if and when the first mortgage balance is satisfied. 

Article Sources

  1. U.S. Mortgage Insurers. "Low Down Payment Facts." Accessed Sept. 3, 2020.

  2. Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or "Junior-Lien"?" Accessed Sept. 3, 2020.

  3. IRS. "Publication 936 (2019), Home Mortgage Interest Deduction." Accessed Sept. 3, 2020.