First Mortgages

First mortgages are pretty much what you'd expect: they are the first (and often only) mortgage on a property.

First mortgages do not differ significantly from second mortgages, except in one way: the main importance of a first mortgage is that it will be the first to be paid off in case of the sale of the property. Also, most first mortgages will be obtained at a lower rate of interest than a second mortgage. This makes sense because the lender of the second mortgage will take a bigger risk. Why? Well, since the first mortgage will be paid out first when a property is sold (regardless of the reason for the sale), the second mortgage could be left unpaid. If that happens, how many people will continue to make payments on a mortgage for a home they don't own any longer? As a result, the lender has a higher chance of default on the mortgage, and a lower chance of getting the loaned money paid in full.

When the risks are higher to the lender, the interest rates will be higher too.

For most of us, this is already more information than we'd ever need. After all, the vast majority of homeowners only have a first mortgage. Furthermore, second mortgages are much less common than they used to be. In today's financial marketplace, more lenders are competing for your business in loans. As a result, many lenders will offer to refinance your home in order to free up equity for you. When they do this, they consolidate all debt into one mortgage.

In the past, if you wanted to access some of that equity in your home, you couldn't increase the size of your original mortgage. So, in order to take advantage of your equity, you had to get a second mortgage.

Today's refinancing options make the equity in your home much easier to get at and use for such things as renovations or debt consolidation. But, be aware of what you are doing. You are taking advantage of "one time" money, which you will have to pay back (in the form of mortgage payments). While refinancing can be a very good strategy, it can also backfire if the value of your home drops substantially for some reason. Keep this in mind when you make your first mortgage bigger.


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