What is the difference between a first and a second mortgage?

A first mortgage is known as the primary loan taken out to purchase or refinance a property. This type of mortgage is secured by the property itself, and in the event of default, the lender has the first claim on the property over other creditors. This means that if the borrower fails to make their payments, the lender can foreclose on the home to recover the amount owed.

The first mortgage typically has priority in terms of repayment during a foreclosure, making it a less risky loan for lenders compared to a second mortgage. In contrast, a second mortgage is an additional loan that uses the same property as collateral but is subordinate to the first mortgage. This subordination means that the lender of the second mortgage would only be repaid after the first mortgage is fully satisfied in the event of foreclosure.

Understanding the nature of these loans is essential for borrowers when considering financing options, as it impacts the total debt on the property and the overall cost of borrowing. A first mortgage generally has lower interest rates compared to a second mortgage due to the lower risk involved for lenders.