Mortgage Loan

By: EconomyWatch   Date: 26 October 2010

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A mortgage loan is offered on a mortgaged property which can range from personal property to commercial or real estate properties.

 

Properties are kept under mortgage as a security for paying off a loan. It can be noted in this context that the term “mortgage” and “mortgage loan” is used synonymously and is often interchangeable.

Technically speaking, a mortgage is defined as the conditional pledge to ones’ property secured against the performance of an obligation or the repayment of a debt. According to investment and economic parameters, it is a debt instrument secured by forwarding any commercial or real estate as collateral which gives the creditor conditional ownership over the asset which can be discharged only upon repayment of the loan amount.

Mortgage loans are generally used when the borrowed sum is high. Mortgage loans are often lower priced than other loans as value of a physical property reduces the risk for the loan provider. In other words, a mortgage loan is secured against the property intended to be bought on the part by the borrower. Mortgage properties usually entail certain restrictions on the use or disposal of the property such as paying any outstanding debt before selling the property. Investing in mortgage properties through loans has become the accepted practice in the developed countries such as the USA and UK.

Some important parties in a mortgage contract are:

The Creditor is an individual or institution who has legal rights to the debt secured by the mortgage and often makes a loan to an individual of the purchase money for the property. In terms of institutions, the creditor can be banks, insurers or other financial institutions. He maybe called as mortgagee or lender.

The Debtor is the person who takes the mortgage loan from the creditor and must meet the mortgage conditions imposed by the creditor in order to avoid the creditor enacting provisions on the mortgage to recover the debt. Usually a debtor can be an individuals, landlords or businesses. The debt issued on the mortgage is also referred to as hypothecation which will use the services of a hypothecary to assist in the process. He is also known as mortgagor, borrower or obligor.Some other terms in this context may be noted as conveyance or the legal document facilitating the transfer of ownership of unregistered land, a freehold meaning the ownership of land and the property, the title recording the ownership of the property and land and a mortgage deed which specifies that the mortgagee or creditor has a legal charge over the ownership of the property. This essentially signifies the transfer of conditional ownership or interest over the asset.

Common types of mortgage rates:

Adjusted Rate Mortgage
Fixed Rate Mortgage
Prime Rate

Fixed rate mortgages remain the same over the debt lifespan which with interest rates a bit higher than 30 year treasury bonds at the time the mortgage is issued. The debtor is required to pay the interest on the mortgage or the mortgage rate and a little bit of the principal with the interest on the principal falling over time. In case of the ARM, the mortgage rate may change in response to the Treasury Bill rate or the Prime Rate. ARM is structured so as to follow market rates with a maximum ceiling rate which cannot be exceeded. ARM’s generally start with lower mortgage rates in order to accommodate future risks out of interest rate fluctuations. Some of the prevailing mortgage rates in the USA are 5%-5.5% for 30 year or 15 year FRM’s, 6% for 30 year fixed jumbo mortgage rates and around 5.5% for ARM.

Mortgage rates can also be “prime” in nature. Prime rates are the lowest interest rates offered by mortgage companies to their most credit-worthy borrowers.Lastly, it can be noted in this context that home loans or home mortgage loans is gaining increasing popularity in India with the Home Financing sector contributing to the immense growth of the mortgage financing industry in recent years. The mortgage rates are set on a fixed or floating rate basis varying between institutions in the range of 12.5% to 16% with loans being offered for 15 years although some of the mortgage companies extend the mortgage tenure up to 20 years or more. The leading mortgage loan providing banks in the case of India are HDFC, ICICI and SBI.

Top mortages companies in the United States are Fannie Mae, Freddie Mae and Countrywide Financial.

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