What Is a First Mortgage?
A first mortgage is the primary loan taken out to finance the purchase of a real estate property, typically a home. It is the senior-most lien against the property, meaning that in the event of a foreclosure, the lender holding the first mortgage is paid back before any other creditors with junior liens. This type of loan is central to the field of mortgage lending, enabling individuals and families to achieve homeownership without paying the full purchase price upfront. A first mortgage is secured by the property itself, making it a secured debt. It dictates the primary terms of repayment, including the interest rate and monthly payment schedule, for the majority of the property's value.
History and Origin
The concept of using property as collateral for a loan has ancient roots, but the modern mortgage system, particularly in the United States, evolved significantly over centuries. Before the 1930s, U.S. residential mortgages were often short-term, typically 5 to 10 years, and frequently concluded with a large "balloon payment" of the principal. This structure made homeownership challenging for many. A transformative shift occurred during the Great Depression with the introduction of longer-term, fully amortized loans. Key governmental initiatives, such as the creation of the Federal Housing Administration (FHA) in 1934, played a pivotal role in stabilizing the housing market and encouraging lenders to offer more accessible terms. These innovations included federally insured mortgages, which reduced risk for lenders and facilitated lower down payment requirements and longer repayment periods, making homeownership attainable for a broader segment of the population.6
Key Takeaways
- A first mortgage is the primary loan used to purchase real estate and holds the senior lien position on the property.
- It covers the largest portion of the property's purchase price, with the borrower typically making a down payment for the remainder.
- In a foreclosure scenario, the first mortgage lender has priority for repayment over any subsequent liens.
- The terms of a first mortgage, including its interest rate and repayment schedule, are foundational to the cost of homeownership.
- The widespread availability of the first mortgage, particularly the 30-year fixed-rate mortgage, has been instrumental in expanding homeownership.
Formula and Calculation
The monthly payment for a first mortgage, assuming a fixed-rate, fully amortizing loan, can be calculated using the following formula:
Where:
- ( M ) = Monthly mortgage payment
- ( P ) = The principal loan amount (the amount of the first mortgage)
- ( i ) = Monthly interest rate (annual rate divided by 12)
- ( n ) = Total number of payments (loan term in years multiplied by 12)
This formula illustrates the concept of amortization, where each monthly payment contributes to both the interest accrued and the reduction of the principal balance over the loan's term.
Interpreting the First Mortgage
A first mortgage represents a significant long-term financial commitment for the borrower. The terms of this loan heavily influence a homeowner's monthly budget and overall financial health. A lower interest rate on a first mortgage translates to lower monthly payments and less interest paid over the life of the loan. The loan amount, determined by the property's appraisal and the borrower's financial qualifications, directly impacts the required down payment. Lenders assess a borrower's financial stability through factors like credit score and debt-to-income ratio to determine eligibility and loan terms.
Hypothetical Example
Consider Sarah, who is purchasing a home for $300,000. She has saved a down payment of $60,000, which is 20% of the purchase price. She needs a first mortgage for the remaining $240,000. Sarah applies for a 30-year fixed-rate mortgage.
- Purchase Price: $300,000
- Down Payment: $60,000
- First Mortgage Amount (P): $300,000 - $60,000 = $240,000
After her application and underwriting process, her lender offers her an interest rate of 7.00% per year.
- Annual Interest Rate = 7.00%
- Monthly Interest Rate (i) = 0.07 / 12 = 0.005833
- Loan Term = 30 years
- Total Number of Payments (n) = 30 * 12 = 360
Using the mortgage payment formula:
( M = 240,000 \left[ \frac{0.005833(1 + 0.005833){360}}{(1 + 0.005833){360} - 1} \right] )
( M \approx $1,596.55 )
This calculation shows Sarah's estimated monthly principal and interest payment for her first mortgage. Additional costs like property taxes and homeowner's insurance would also be part of her total monthly housing expense.
Practical Applications
The first mortgage is fundamental to property acquisition for most individuals and businesses, forming the bedrock of real estate markets. It is the most common way to finance the purchase of residential properties, enabling wider access to homeownership. Lenders offering first mortgages engage1, 2, 345