 Sam
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Posted: Thu Apr 01, 2004 2:38 am Post subject: First Mortgage
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First mortgage is a mortgage that has primary claim over the property which is kept as security for the home loan. Any other lien against the property has secondary claim over it. This implies that if a borrower fails to pay off the first mortgage, then on foreclosure he will have to pay off the first lender and then the second lender be paid his dues.
For example, Mathew took a first mortgage of $150,000 from Carole by securing his house and a second mortgage of $90,000 from Jennifer by securing the same house. He defaults on the loan, and at that time, the remaining balance on first mortgage is $100,000 and on second mortgage is $50,000. The value of the property at that time is $160,000. On foreclosure, Carole will first receive $100,000 as well the required interest after which Jennifer will get back her dues.
Features:
- The first mortgage is offered with respect to the sale price or the appraised value of the property, whichever is less. The property is pledged as the security to make up for losses in case the borrower refrains from making monthly payments.
- Borrowers having good credit history are offered a higher loan-to-value ratio, that is, about 80% of the appraised value or the sale price, whichever is less. They can also qualify for loans having reasonable interest rates.
- Apart from this, borrowers are required to pay points (1 point = 1% of the loan amount) that helps them to repay the loan at lower interest rate. There are a number of fees, such as appraisal fee, loan origination fee, underwriting fee etc to be paid apart from points.
- The borrower has to pay back the entire loan along with interest as well as property taxes and insurances to protect the lender from monetary loss if the borrower fails to make the monthly payments.
- First mortgages are broadly classified as fixed rate and adjustable rate mortgages. With fixed rates, the monthly payments are fixed and with adjustable rate mortgages, the rates adjust periodically.
In case a borrower fails to repay the loan within the specified time, the lender conducts a foreclosure which results in the sale of the property. The borrower has to first pay off the first mortgage from the sale proceeds and then other mortgages, if any. |
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