Understanding Mortgage: The Basics
Definition
According to on Barron’s Dictionary of Real Estate Terms, Mortgage is defined as a written instrument that creates a lien upon real estate as security for the payment of a specified debt. For example: if you want to buy a home, you need a loan to complete the purchase. As collateral, you offer a mortgage on the property to the lender. Note that the borrower gives the mortgage, which pledges the property as collateral. The lender gives the loan.
So, a mortgage is nothing but a loan secured against the property that is your home, here secured means if you are not prompt with your loan payments, the lender has the rights to sell your home to take back his amount he has lent to you. A mortgage is a piece of paper, but the paper is so important that an individual see during his financial life.
The loan that is taken against mortgage is termed as ‘mortgage loan’. This loan is taken in many countries mainly for the purpose of purchasing home.
People Involved in Mortgage
Mortgage can be taken from banks or money lenders in many countries. People involved in mortgage include creditor, debtor and at times a legal representative. The term creditor can also be used synonymously with lender or mortgagee. Money lenders, insurers, banks or financial institutions are creditors who provide the money to the person in exchange of property.
A borrower is also known as debtor, obligor or mortgagor. A debtor gets the amount equal to the value of the mortgaged article. A mortgagor is required to abide by all the obligations or conditions of creditors. Or, else there are chances that as a way of recovering debt, the property may be taken away by the creditors. There are various properties as a result of foreclosure. These properties are available for reasonable costs for the other buyers.
It is always that the legalities of mortgage are done under the supervision of a lawyer. All the conditions and the amount of money involved should be stated in written and signed by the creditors, debtors and lawyer present. It adds authenticity and removes any confusion if any.
Currently many Certified Financial Planners work in combination with Certified Mortgage Planners so as to provide mortgage loans to financially sound people.
In addition to creditors, debtors, legal representatives and government agencies, there is involvement of pension funds and life insurers.
Other Mortgage Terms
Terms involved in the legal process of mortgage loan are Disbursements, Mortgage Deed, Conveyance, Land Registration, Sealing Fee, Freehold, Leasehold, Seasoned mortgage and Legal Charge. Their definitions are described below.
- Freehold is defined as the land and property ownership.
- Disbursements include all the money involved as search fees, stamp duty and land registry.
- Legal Charge is a document that has all the minute details of the land or property owner. Conveyance is the document that transmits the possession of unregistered property.
- Sealing Fee is paid when the creditor discharges the charge over the land.
- Land Registration is also referred as title. This document contains the details of the ownership of land and property.
- Seasoned mortgage is linked with secondary market. In seasoned mortgage payment is made on regular basis.
- Mortgage Deed is a document that gives detail of possession of ownership.
- Legal mortgage – There are essentially two types of Legal Mortgage:
Under mortgage by demise – A lender becomes the legal owner of the mortgaged land till the money is paid in full. A lender is free to auction or sell the mortgaged property.
While under Mortgage by legal charge, a lender can not sell the mortgaged land. He may possess the land legally but the right of selling and buying of the land lies with the debtor. Also, to provide safety to the lender, the details of mortgage are recorded in a register.
Mortgage Deal
The mortgage itself is a deal that a number of people have used in order to make their financial dreams come true and indeed the deal works something like this. Mortgage providers are usually willing to loan the person up to 95% of the value of the house, which the person can then combine with their 5% down payment in order to purchase the house. Once purchased, the house then goes up as collateral against the loan from the bank and the person then proceeds to pay the loan back over a period of twenty to forty years.
Mortgage Payment
When you purchase a home, you need to reserve your money for insurance, taxes in an escrow account, so when you get the mortgage, your payment would be divided into four categories that is called PITI (Principal, Interest, Taxes and Insurance)
- Principal is the loan amount balance and that gets paid during the years of mortgage you have chosen.
- Interest is the amount you pay for the loan amount, in amortized loans the entire repayment of loan amount goes for the interest in the early years and in the later years repayment goes for the principal loan amount.
- Taxes is something you owe annually to the government for water treatment, schools and to the cop on the corner and at this time the escrow account helps you to make the payment in monthly installments.
- Insurance is very important thing as you can’t imagine losing your home for any kind of disaster, and this insurance is being paid by escrow account in 12 installments.
Interest Rate
It is the fact that mortgages as loans will usually have lower interest rates on average than most other types of loans. Further to that point, most mortgages will also have a lower monthly repayment rate which ultimately serves to point out to the average observer that a number of different things about mortgages make them far better than any other loan available in the money lending market today. It is one of the advantages of the mortgage.
There are two types based on its interest rate:
- Fixed Rate Mortgage – you are charged with static interest rate. If you can get a relatively low interest rate when you apply, it would be the best option as there would be no change in monthly payments for the loan amount you have gone for 15 years or 30 years of mortgage.
- Adjustable Rate Mortgage – If you think that the interest rate will go down significantly in the following years, you can opt for Adjustable Rate Mortgage (ARM). This adjustable rate mortgage has variable rate of interest and the payment varies annually or anytime whenever there is change in the interest rate. If the interest rate goes up your mortgage payment goes up.
Adjustable Rate Mortgages are being called as “Interest rate risk” unlike fixed rate mortgages where you are very confident about how much you are making the payment for the principal, interest, taxes and insurance every month through out your loan repayment years.
On one side, mortgages have made the dreams of millions come true specifically because they allowed a person to be able to purchase a house without having to be in possession of money equivalent to the property value of that house and lot. While on the other side, bad credit mortgages could lead to current global economic crisis that we have experienced now.
So, it is wise to measure your affordability before deciding purchasing a house with mortgage to avoid bad credit problem in the future. Choosing the right mortgage is also important and it deserves a little research and knowledge.
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