Mortgage Definition: Agreement of a loan to finance the purchase of a real estate, usually with specified payment periods and interest rates which allows a lender to seize property when a borrower fails to pay.
The term mortgage is a French law term which stands for “death pledge.” It can, therefore, be defined as a debt instrument, and secured by collateral of specified property that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases at once. The borrowers repay the loan plus interest over a period of many years until he or she eventually owns the property free and clean. Mortgages are also known as ‘claims on property’, which means that the bank can foreclose if the borrower stops paying the mortgage.
Mortgage loan involves two separate documents which are assigned together: the mortgage or promissory note and security interest. If these documents are split traditionally the holder of the note and not the mortgage has the right to foreclose. Mortgage has become a generic term for a loan secured by real property. This is evident among the laws of various countries for instance the Anglo-American property law where mortgage occurs when an owner pledges his or her interest as security for a loan. Therefore, a mortgage is a limitation on the right to the property just as an easement would be, and as such most mortgages occur as a condition for new loan money.
Mortgages come in many forms. First is the fixed rate mortgage which is also called traditional mortgage, here is where the borrower pays the same interest rate for the life of the loan. His or her monthly principal and interest payment do not change. While a significant drop in the market interest rate would enable the borrower to secure that lower rate by refinancing the mortgage. Secondly, is an adjustable rate mortgage, this is where the interest rate is fixed for an initial term, but fluctuates with market interest rates. The initial interest rate is often a below market rate, which can make the mortgage seem more affordable than it is. If the interest rates increase at a later date, the borrower may not be able to afford the higher monthly payments. Interest rates could also decrease, making this form of mortgage less expensive. Other types of mortgages, such as interest-only mortgages and payment-option adjustable rate mortgage are best used by sophisticated borrowers.
In conclusion, mortgage loans are structured as long-term loans, and the periodic payments are calculated according to the time value of money formula. Mortgage lending institutions in most of the cases take into account the riskiness of the mortgage loan, that is the likelihood that the funds will be repaid. Mortgage presents many with an opportunity to acquire property without paying for it at once. For instance, a home buyer or builder can obtain financing either to purchase or secure against the property from a financial institution. Such as bank or credit union, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off loan, and other characteristics can vary considerably.