First mortgage is the term applied to the primary mortgage on a property that is securing more than one loan. Every homeowner that has taken out a home equity loan (or second mortgage) or that holds a home equity line of credit (HELOC) has a primary and a secondary debt associated with his/her home. The first mortgage is the primary loan that was initially secured in order to purchase the home.
The issue of first mortgage status comes into play usually only when the borrower defaults on the loan. The lender on the first mortgage has priority over the lender for the HELOC or the second mortgage. If the home goes to auction and is sold off by the bank, the first mortgage holder gets paid first. If a home in default is sold, the first mortgage holder may extract all of the principal he is owed plus any unpaid interest and any foreclosure costs that have been incurred. The holder of the second note can collect only from what remains available from the net of the home sale.
Homeowners with two mortgages on the house have occasionally gotten an unpleasant surprise when attempting to refinance the first mortgage. Home equity loans or HELOCs are often written such that the homeowner must seek approval from the second mortgage holder in order to refinance the first mortgage. In this situation, the second mortgage is not subordinate to the first since the holder of the second note can control refinancing on the first.
This has become a truth-in-lending issue, as many people who have taken cash out of their homes with home equity loans aren’t aware that they are signing away the control over refinancing the primary mortgage. Some home equity lenders will charge a fee for refinancing on the primary mortgage.
In the case of a pending loan default, a home equity lender may purchase the first mortgage and work with the homeowner in order to avoid default. This option makes sense if the home is not likely to sell for much more than is owed on the first mortgage. The home equity lender is protecting his own risk by attempting to keep the entire loan package afloat.
First mortgage status generally allows the lender to provide flexibility to the borrower if he/she is having financial difficulties and can’t make the mortgage payments. Banks have a profound distaste for foreclosures, simply because they cost money to execute. For that reason, a bank that holds a first mortgage is likely to try and find a realigned loan agreement that will work.
The number one reason that homeowners have cited for taking out second mortgages is to consolidated debt. Incurring more debt in order to retire debt is pointless unless spending patterns change. For that reason, if a homeowner has no plans to move it often makes sense to refinance the first mortgage on a home that has gained equity rather than taking out a second loan. The interest rates will be lower because the subordinate position of the second lender is eliminated from the equation.