First mortgage

First mortgage
See also


First mortgage is first lien on the property. A person who wants to buy a property and does not have sufficient equity may decide to take out a loan against that property. This loan is called the first mortgage, and the lender has a pledge on the property they finance and priority in pursuing the claim against any secondary mortgage in the event of default on the borrower [1].

It should be noted that the first mortgage is understood here as the original loan for one or several properties, not as a loan for the purchase of the borrower's first home. This means that when the holder of two houses takes out a mortgage for both of them, both mortgages will be the first mortgage.

In a situation when the borrower ceases to pay the loan, the lender, having a pledge on the property, can take it over and initiate the enforcement proceedings to sell it, thus regaining the due liability. In the event that there is more than one mortgage on the real estate, the first mortgage is regulated before any another claim [2].

First Mortgage vs. Second Mortgage[edit]

The first mortgage concept suggests that the property may be burdened with more mortgage loans. When the first mortgage is valid, another loan for the property is called a second mortgage and is subordinated to the original mortgage [3].

In practice, this means that the new creditor is entered in second place in the land and mortgage register, which is a security for the liability. For many creditors, this is a risky solution because if the borrower turned out to be insolvent and the real estate would be auctioned, the obtained funds will be transferred to cover the receivables in the order of entry in the land and mortgage register. This means that first of all the claims of the lender will be satisfied first, and the next lender will receive what will remain from the amount obtained through the auction. Therefore, second mortgage loans usually have higher interest rates than the first ones [4].

The first mortgage is usually contracted for the purchase of the real estate, and then a second mortgage for the renovation or improvement of this property [5].

First Mortgage Example[edit]

A young man would like to buy a house for $ 400,000, but he can not afford to buy using only cash. He has savings of 80,000 USD, the rest of 320000 USD is financed under the first mortgage. After a few years, he manages to repay 20,000 USD, but he [[needs]] new funds for renovation and other repairs. For this purpose, it takes out a second loan (second mortgage) in the amount of USD 50,000. Unexpectedly, he is hit by financial problems and ceases to pay off the loan. In this situation, the lender closes the mortgage by taking over the property, which is later sold to cover the loan. The house is sold for $ 330000, which allows it to copay out the first lender, and the second will get what is left, in this case, 30,000 USD. The other lender did not receive a full claim because the sale of the property did not provide adequate proceeds to cover both lenders. According to the principle that the first mortgage takes precedence over any other claim subsequently entered into the mortgage[6].

Footnotes[edit]

  1. Weiss M.A., 1989
  2. Adelino M., Schoar A., Severino F., 2012
  3. Hurst E., Stafford F., 2004
  4. McDonald D.J., Thornton D.L., 2008
  5. Jagtiani J., Lang W.W., 2010
  6. McDonald D.J., Thornton D.L., 2008

References[edit]

Author: Izabela Wilczyńska