Mortgage and Finance

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Mortgage and Finance are not mutually exclusive terms and are very much dependent on one another. Mortgage is one of the various modes of financing available to the numerous economic agents for respective purposes of the economy. We can say that mortgage is a subset of finance.

Mortgage and Finance are not mutually exclusive terms and are very much dependent on one another. Mortgage is one of the various modes of financing available to the numerous economic agents for respective purposes of the economy. We can say that mortgage is a subset of finance.

Reverse mortgages for homes valued above the Fannie Mae limit is called cash accounts or proprietary loan Finance is the study of raising, allocating, and utilizing monetary resources over time, either by individuals, businesses or organizations after taking into consideration the risks associated with the concerned projects. It is a science of managing money and other assets by means of channelization of funds (in the form of invested capital, credits, or loans) to those economic agents who are in need of the same for productive investments or otherwise.

For example, on one hand, the consumers, business firms, and government needs fund for making their expenditures, pay debts, or complete other transactions. On the other hand, savers accumulate funds in the form of savings deposits, pensions, insurance claims, savings or loan shares, etc which becomes a source of investment funds. Here, finance comes to the fore by channeling these savings into proper channels of investment.

Broadly, finance can be classified into three fields:-

(1)Public Sector Finance: Financing in the government or public level is known as public sector finance. Government meets its expenditures mainly through taxes. Government budget generally don’t balance, hence it has to borrow for these deficits which in turn gives rise to public debt.

(2)Business Finance: It tries to optimize the goals (profit, sales, etc.) of a corporation or other business organization by estimating future asset requirements and then allocating funds in accordance to the availability of funds.

(3)Personal Finance: It basically deals with the optimization of finances on individual (single consumer, family, personal savings, etc.) level subjected to the budget constraint. e.g. A consumer can finance his/her purchase of a car by taking a loan from any bank or financial institutions.

Mortgage is a legal agreement which conveys conditional ownership of home as a form of security for a financial obligation. The borrower of the debt gives a mortgage to the lender in exchange of the right of using the asset till the mortgage collapses. This agreement becomes void as soon as the financial obligation is repaid. Generally, mortgage is a debt instrument of long-term nature (normally 15 to 30 years) and involves real estates. Mortgages are required to be executed according to the formalities of the laws of the land where the property is located.

Buildings and houses to organizations, companies and individuals where the property concerned is being mortgaged by the lender institution until and unless the loan is repaid.

In case of default in payment of debt the creditor has the right of moving to the court for seeking court-ordered sale of the house (foreclosure lending), and the consequent proceeds are used to pay the debt.

Foreclosure lending is that type of lending where in certain conditions (mainly, non-payment of the mortgage loan) a mortgagee may foreclose the mortgaged home. This type of lending is most common in majority of jurisdictions. In foreclosure lending, the onus of payment of outstanding due lies with the mortgagor. Mortgage Finance is the field which deals with the borrowers of loan, lenders of national level and brokers, who act simultaneously for making a fruitful deal for a new real estate production. This has materialized the building up of the high rises. Mortgage finance refers to the different avenues of financing instruments used for the purpose of acquiring a real estate property.

Banks, insurance companies and other financial institutions give a part of the purchase price of Mortgage finance generally refers to the loan taken for the purpose of acquiring a real estate property (either residential or commercial) which is secured by a mortgage on the same (like personal house). In most countries, mortgage lending is used as the primary source for financing properties.

Mortgage finance basically are of two types (based on the purpose of the mortgagor of taking the mortgage loan) :-

(i)Residential Mortgage :- Here, the home or property which is meant to be bought is pledged to the bank by the buyer of the home. If the buyer defaults in payment then the bank has all the rights for claiming the house.

(ii)Commercial Mortgage :- Commercial Mortgage Finance is basically a loan done by the business entities (partnership firms, incorporated businesses, or limited companies) where the concerned real estate is used as collateral for securing the repayment of the same and other corresponding issues related to financing of the commercial property (commercial building or other business estate).

In general, commercial mortgage finance are non-recourse loans.Non-recourse Lending is that type of lending where if the proceed from the sale of the mortgaged home are not sufficient to cover the outstanding debt then the mortgagee may not have recourse to the mortgagor after foreclosure.

In USA, the most common mortgage loans are the following :-

(1)Fixed Rate Mortgage Loan (FRM)The rate of interest remains constant throughout the life-span of the loan.

(2)Adjustable Rate Mortgage Loan (ARM)The interest rate of a adjustable rate mortgage loan is liable to change in accordance to the change in the market conditions which is again determined by a financial index (like LIBOR index). Variation in the interest rate of every ARM loans are restricted to a limit on both sides (i.e. Upper and lower limit).

(3)FHA MortgageIt is a mortgage where the loan is secured by the Federal Housing Administration (FHA), an agency of Department of Housing and Urban Development (HUD), USA.

(4)VA LoanVA loan program are exclusively for the veterans of the country. It gives loan for home building purposes to them at a rate lower than the other types of mortgages.

(5)Refinance LoanRefinance loan completely replaces the mortgage that one has. In majority of cases, the mortgage company pays off the existing mortgage of a debtor for a reduced rate and a new mortgage is then drawn up. In this way the interest rate scales down and consequently the payment amount decreases.

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