Purchasing a home is one of the most expensive transactions out there, which is why, for many people, it’s the biggest purchase they’ll make for most home buyers who are getting a mortgage for the first time and then making monthly payments until the loan is paid in the full amount.
The first mortgage refers to a loan that you initially make to purchase your house. At the same time, the second mortgage is a mortgage for home equity (also known as a credit line) taken against the property’s value without refinancing.
Mortgages are available with a variety of conditions. You can get a fixed interest rate for just 15 years or as long as 30 years. There is also an adjustable-rate mortgage (ARM), which means that your rate changes based on the market. Your particular situation will determine the best option for you.
How Does a First Mortgage Work?
If you are buying a house and you want to make the payment in cash or get a mortgage. Many borrowers cannot afford to purchase a house in advance and instead take out the home mortgage to finance their house.
When you submit a request for a mortgage, after which you receive your approval and close on the house, Your lender will then send the paperwork necessary to arrange monthly installments.
Technically, your lender is the owner of your house as you pay your monthly mortgage and reside in the home until you pay off your mortgage completely. If you fail to pay your mortgage and fall behind, your lender could put a lien on the property and even foreclose. It could result in losing your home when the lender acquires your property.
The mortgage you take out can be a legally binding agreement that requires you to make timely monthly payments in order to pay off the loan. The amount is derived from the principal balance, as well as any fees, interest, or other costs. While the terms of your servicer and lender could change with time in second mortgage markets, the terms of your loan will not change unless you choose to refinance.
In the event that you refinance your mortgage, you’re eligible for new terms and an increase in interest. But the loan you refinanced is now your primary mortgage.
Examples of a First Mortgage
A first mortgage could be in a variety of forms, according to the kind of mortgage you are able to get.
Conventional Mortgage
Private lenders provide conventional mortgages, which are the most well-known mortgage choices. Although the requirements differ between lenders, they usually meet a set of common standards.
The majority of people can obtain a traditional loan with an average credit score of 620 or less without a major credit issue like bankruptcy or previous foreclosure. Although having 20% of your down payment does not eliminate the need for private mortgage insurance (PMI) however, those with better credit scores are still able to get approval with a down payment of as little as 3%-5 percent. We suggest keeping your debt-to-income (DTI) ratio to less than 43 percent (although some lenders will accept as high as 50 percent).
FHA Loan
FHA loans are backed by the Federal Housing Administration. Although FHA loans are not insured, the FHA is a federal agency and not a direct lender; it does work with private banks as well as other financial institutions that offer loans in this category. FHA loans are ideal for borrowers who have lower-than-average credit scores as well as those with down payments that are as low as 3.5 percent of the house cost.
VA and USDA Loans
Similar to FHA mortgages, the VA loan as well as USDA loan are also insured by federal agencies, the Department of Veterans Affairs and the Department of Agriculture, respectively. They both require no down payment. However, they have additional conditions to fulfill requirements, like being a veteran or buying a home in a specific area.
Jumbo Loans
Jumbo loans offer higher lending than the limits set by the Federal Housing Finance Authority (FHFA). They’re nonconforming conventional loans due to their larger loan amounts; you could have to satisfy more stringent qualifications that are set for you by the lending institution.
Second Mortgage and First Mortgage. Second Mortgage
The first mortgage you take out will be your main mortgage, the second mortgage a credit line or home equity credit, which you can utilize to finance other projects or requirements such as home improvements or repairs, renovations, and other similar costs.
Your second mortgage is typically in relation to the equity you own in your home and lets you borrow what you’ve paid off of your property to finance new projects. Cash-out refinances are not an example of a second mortgage.
Interest Rates
Second and first mortgages may have variable or fixed interest rates based on the kind of loan you are borrowing. For instance, home equity loans have fixed rates, whereas HELOCs come with variable interest rates.
Rates of interest are generally higher for second mortgages than first mortgages. However, both depend on your credit score and the amount you wish to take out.
Loan Limits
When you apply for a first mortgage, your lender will calculate the amount you’re able to take out. In second mortgages, the limit for loans is determined by the amount of equity you own in your home, which is up to a specific percentage. It is possible to get a loan of up to 85 percent of the equity on your property.
If you’re not sure of the amount you’re eligible to borrow, make use of a house equity calculator to determine your home’s equity.
Default and Foreclosure
If you fail to pay your initial mortgage, your lender can confiscate your property and foreclose on your house.
If you fall behind on your second mortgage, you’ll be able to get a lien will be placed on the portion of the house that you’ve paid off. Although your first mortgage has priority, not repaying the second mortgage could cause the lender to initiate legal action. For instance, the lender could seek to take over your home.
There are many ways to find a lender but, finding the home of your dreams could be as simple as connecting MyState MLS with your agent or yourself (in the event you are a broker or agent). Check out the latest MLS listings online today!
