Buying a home is a significant milestone, and for most people, this journey starts with a first mortgage. But what exactly does this term mean? Whether you’re a first-time buyer or exploring real estate financing, understanding a first mortgage is essential to navigating homeownership.
In this guide, we’ll break down what a first mortgage is, how it works, and how it compares to other financing options like second mortgages.
Key Takeaways
- A first mortgage is the initial loan taken out to purchase a property, secured by the home as collateral.
- It has priority over other loans or liens on the property.
- First mortgages are often used for long-term financing, with structured repayment schedules.
- The loan’s terms, including interest rate and repayment period, vary based on the borrower’s financial profile and the lender’s policies.
What Is a First Mortgage?
A first mortgage refers to the primary loan used to purchase a home. It is called “first” because it takes precedence over other loans secured by the property. If the borrower defaults, the lender holding the first mortgage has the right to recover the outstanding amount by selling the home before other creditors can claim any remaining equity.
First mortgages are offered by banks, credit unions, and specialized lenders, often featuring repayment terms of 15, 20, or 30 years.
How Does a First Mortgage Work?
A first mortgage is a secured loan, meaning the property serves as collateral. Here’s how it typically works:
- Loan Approval: The borrower applies for the mortgage by providing details about their income, credit history, and assets. The lender evaluates this information to determine eligibility.
- Down Payment: Borrowers usually pay a portion of the home’s price upfront, known as the down payment. The remaining cost is covered by the first mortgage.
- Repayment Structure: The loan is repaid in monthly installments over a set term, which includes principal (the borrowed amount) and interest.
- Lien Placement: The lender holds the primary lien on the property, ensuring they are the first to be repaid if the home is sold or foreclosed.
Example of a First Mortgage
Let’s say you’re buying a home worth KSh 10 million in Kenya:
- You make a 20% down payment (KSh 2 million).
- The remaining KSh 8 million is financed through a first mortgage.
- Your lender offers a 20-year loan term at an annual interest rate of 12%.
- You’ll make monthly payments to repay both the principal and the interest over the 20 years.
First Mortgage vs. Second Mortgage
First Mortgage
- Primary loan used to purchase the home.
- Takes priority over other loans or liens.
- Typically has lower interest rates than second mortgages.
- Used for long-term financing.
Second Mortgage
- Additional loan taken out after the first mortgage, often for home improvements or other expenses.
- Subordinate to the first mortgage in repayment hierarchy.
- Usually comes with higher interest rates due to increased risk.
- May involve shorter repayment terms.
FAQ
What Are the Tax Implications of a First Mortgage?
In many countries, including Kenya, mortgage interest payments may qualify for tax deductions. Check local regulations or consult a tax advisor to understand potential benefits.
What Is the Loan-to-Value Ratio on Mortgages?
The loan-to-value (LTV) ratio compares the mortgage amount to the home’s market value. For example, if you borrow KSh 8 million for a home worth KSh 10 million, your LTV is 80%. Lower LTV ratios often lead to better loan terms.
What Is the Loan Limit on a Mortgage?
Loan limits vary depending on the lender and the borrower’s financial profile. In Kenya, limits may also depend on the property’s value and type. Speak with lenders to understand your borrowing capacity.
What’s a Primary Lien on a Home?
A primary lien is the legal claim a lender has on the property when issuing a first mortgage. It ensures the lender is repaid first in case of foreclosure or sale.
Conclusion
A first mortgage is the foundation of homeownership, offering a structured way to finance your dream home. By understanding how it works and its key features, you can make informed decisions when navigating the home-buying process.
Partnering with a trusted real estate developer can simplify the process, providing expert guidance and access to financing options tailored to your needs. Take the first step today toward owning your dream home!