Mortgage: What is a Mortgage?

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What is a Mortgage?

In most countries, a mortgage is the primary way that prospective homeowners have of buying a house, flat or land on which to build a property, collectively called real estate. This type of mortgage is called a residential mortgage or home loan. They are most often taken up by individuals or couples


What is a Mortgage?

In most countries, a mortgage is the primary way that prospective homeowners have of buying a house, flat or land on which to build a property, collectively called real estate. This type of mortgage is called a residential mortgage or home loan. They are most often taken up by individuals or couples

Mortgages are also commonly used to for commercial property, such as offices, factories, retail outlets or building containing multiple units such as office blocks, shopping malls and warehouses. This type of mortgage is called a commercial mortgage or commercial property loan. They are most often taken up by businesses rather than individuals, although individual investors may also purchase commercial property.

The prospective buyer will borrow money from a bank, credit union or other financial institution – the mortgage lender – and use that money to fund some, most or all of the cost of the purchase. They will then pay the money borrowed – the principal – over time, together with an interest payment. The property bought provided as security for the mortgaged amount. So, if they do not pay the money on the agreed schedule, that is if they default on the loan, the lender has the right to take possession of the loan as a foreclosure.

Mortgages nowadays are typically associated with real estate, although they did historically cover property in general, including crops, factory equipment, ships and trains.

The term mortgage derives from the French term ‘dead pledge’. This means that the mortgage agreement ends when the loan is paid off, or when the property is taken into foreclosure.

In most legal systems, the borrower has legal right to the real estate, but the lender has legal rights to enforce ownership of the security if the loan falls delinquent, for example to sell the property or take ownership and rent it out.

What is Involved in a Mortgage?

These are the main components of the mortgage process that you need to understand:

Mortgage Lender

A mortgage lender is typically a bank, credit union, building society or other form of financial institution.

Borrower

That is probably you – the person looking to borrow money to fund a purchase.

Mortgage Broker

Not to be confused with a lender. A mortgage broker helps prospective buyers to find the best mortgage deal for their needs, to compile the paperwork and complete the mortgage application process.

Option to Purchase

It is common for a property seller to sell you an option to purchase a house, at an agreed price. This option has a set expiry date, and will include a payment, often set as 1% of the final purchase.

Mortgage Down Payment

In most property purchases, the buyer will need to pay some of the total cost themselves. It is worth noting that in the boom years of 2001 – 2007, many lenders in developed markets where offering mortgages that covered the total cost of the purchase, or in extreme cases up to 125% of the real estate sale price. This was based on the assumption that property prices would continue to rise dramatically.

Alas, the Financial Crisis proved that assumption was not true! With so many foreclosures and borrowers behind in their payments in so many mature markets, and with so many banks having credit problems of their own, down payment requirements have increased.

It is common now for 10% – 40% down payments to be required.

Annual Percentage Rate or APR

In order for a bank to lend you money, they need to make some money out of the transaction. They do this mainly by charging an interest rate. This is expressed as the Annual Percentage Rate or APR.

Fixed Rate Mortgage

A fixed APR is defined on the mortgage.

Floating Rate Mortgage or Variable Rate Mortgage

Mortgage interest rates are related to the interest rates defined by each country’s central bank, which defines the rate at which banks can borrow money from the central bank to help fund principal payouts.

A floating rate or variable rate mortgage will fluctuate to reflect those changes. It may be defined for the first few years, it may be at the banks discretion, or it may be tied to central bank interest rates plus an additional amount, or to some other nationally recognised figure.

Mortgage Refinancing or Mortgage Refinancing

If mortgage rates go down, or if terms are loosened, then it may be advantageous for a borrower to pay off their current mortgage with a new mortgage that reduces interest rate payments, increases the length of the plan, or provides some other benefits. This is known as mortgage refinancing or mortgage refi.

Lock In Period

The mortgage lender may specify a period in which they will charge a penalty if the house is sold and the mortgage paid up, or if the home loan is refinanced

Mortgage Fraud

Sadly this is a growing problem. You can read up the excellent guide at mortageloan.com on mortgage fraud and what to do about it.

EconomyWatch.com Mortgage & Real Estate Resources

We have compiled a set of guides to help you understand the technicalities of purchasing or investing in real estate, comparing and securing the right mortgage for your circumstances. We included detailed guides to mortgage and real estate markets by country, and by US state and city.

 

Country Mortgage


US Mortgage

Mortgage Overview

Mortgage Company

Mortgage Broker

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