A mortgage loan, also referred to as a
mortgage, is used by purchasers of real property to raise money to buy
the property to be purchased or by existing property owners to raise funds for any
purpose. The loan is "secured" on the borrower's property. This means that a legal
mechanism is put in place which allows the lender to take possession and sell the
secured property ("foreclosure" or "repossession") to pay off the loan in the event
that the borrower defaults on the loan or otherwise fails to abide by its terms.
The word mortgage is derived from a
"law French" term used by English lawyers in the middle ages meaning
"death pledge", and refers to the pledge ending (dying)
when either the obligation is fulfilled or the property is taken through foreclosure.
Mortgage borrowers can be individuals mortgaging their home or they can be businesses
mortgaging commercial property (for example, their own business premises, residential
property let to tenants or an investment portfolio).
Features of mortgage loans
- The size of the loan,
- Maturity of the loan,
- Interest rate,
- Method of paying off the loan and
- Other characteristics can vary considerably.
Basic concepts and legal regulations
According to Anglo-American property law, a mortgage occurs when an owner (usually
of a fee simple interest in realty) pledges his or her interest (right to the property)
as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation)
on the right to the property just as an easement would be, but because most mortgages
occur as a condition for new loan money, the word mortgage has become the generic
term for a loan secured by such real property. As with other types of loans, mortgages
have an interest rate and are scheduled to amortize over a set period of time, typically
30 years. All types of real property can be, and usually are, secured with a mortgage
and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private
ownership of residential and commercial property (see commercial mortgages). Although
the terminology and precise forms will differ from country to country, the basic
components tend to be similar:
Property: the physical residence being financed. The
exact form of ownership will vary from country to country, and may restrict the
types of lending that are possible.
Mortgage: the security interest of the lender in the
property, which may entail restrictions on the use or disposal of the property.
Restrictions may include requirements to purchase home insurance and mortgage insurance,
or pay off outstanding debt before selling the property.
Borrower: the person borrowing who either has or is
creating an ownership interest in the property.
Lender: any lender, but usually a bank or other financial
institution. (In some countries, particularly the United States, Lenders may also
be investors who own an interest in the mortgage through a mortgage-backed security.
In such a situation, the initial lender is known as the mortgage originator, which
then packages and sells the loan to investors. The payments from the borrower are
thereafter collected by a loan servicer.)
Principal: the original size of the loan, which may
or may not include certain other costs; as any principal is repaid, the principal
will go down in size.
Interest: a financial charge for use of the lender's
money. Foreclosure or repossession: the possibility that the lender has to foreclose,
repossess or seize (auction) the property under certain circumstances is essential
to a mortgage loan; without this aspect, the loan is arguably no different from
any other type of loan.