First mortgage loans are any loans secured by residential or commercial property that occupy the first lien position on the property being financed. Laws in many places enable borrowers to secure two or three loans with the same piece of property, but the first lien holder has the senior claim on the property in the event of borrower default. Borrowers can use mortgages to buy or to refinance property. Mortgage lenders offer much lower interest rates on first mortgage loans than loans that occupy the second or third lien position.
When a lender writes a loan secured by property, the lender can assume control of that property if the borrower defaults on the loan. Lenders sell property seized from delinquent borrowers and use the proceeds to settle the debt. Due to the danger of a piece of property losing value over time, most lenders do not allow borrowers to establish first mortgage loans that are equal to 100 percent of the property value. Borrowers buying property must cover the remainder of the purchase price with separate funds or take out a simultaneous second mortgage to cover the rest of the purchase price.
Property owners can payoff existing first mortgage loans as well as other debts secured by a particular property by taking out a refinance loan. In order for the new mortgage to occupy the first lien position, all other liens must be paid off with proceeds from the refinance loan. Any remaining lien on the home that pre-dates the refinance mortgage will occupy the first lien after the refinance occurs. Borrowers with existing second liens can only leave those loans in place and establish a new first lien mortgage if the current second lien holder signs a subordination agreement. A subordination agreement allows a newly written loan to move into first lien position on a property ahead of already existing liens.
Lenders enable borrowers to take out both fixed rate and variable rate first mortgages. Term times on fixed rate loans typically range from 10 to 30 years. Variable rate loans either have rates that adjust throughout the entire term of the loan or begin with an introductory period, during which the borrower pays an interest only variable rate and a second phase in which the borrower makes both principal and interest payments. Lenders usually do not allow borrowers to establish second liens behind variable rate first liens because of the potential for rising interest rates to deplete the property owners’ equity over the course of time.