Mortgage

Intro

A mortgage is a device used to create a lien on real estate by contract. The mortgage is an instrument that the borrower (called the mortgagor) uses to pledge real property to the lender (called the mortgagee) as security for a debt, also called hypothecation.

The mortgage instrument contains two parts:

• the mortgage, which is the pledge
• the note, which is the actual evidence of the debt and promise to repay (sometimes called a promissory note).

To protect the lender, a mortgage is recorded in the public records creating a lien (when there are multiple liens, order of recording determines priority).

History

At common law, a mortgage was a conveyance that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were met --- usually, but not necessarily, the payment of a debt by the original landowner. Hence the word "mortgage," Law French for "dead pledge;" that is, it was absolute in form and in theory required no further steps to be taken by the creditor.

In many U. S. states, however, a mortgage has been converted by statute to a device for creating a security interest in land. When the landowner fails to perform on the obligation secured by the mortgage, the mortgage holder must file a foreclosure to cause the property to be sold at auction, usually by the sheriff. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that the lien of the mortgage is prior to anyone else's claim.

Mortgage finance industry

Mortgage lending is a major category of the business of finance in the United States of America. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the USA the Home Owners Loan Corporation, the Federal Housing Administration administer the programmes colloquially known as "Ginnie Mae" and "Freddie Mac" (aka the GSE's - the government sponsored enterprises) to foster mortgage lending and thus to encourage home ownership and construction.

Mortgage loan types

There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).

In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the US, the term is usually for 15 or 30 years. In the UK the fixed term can be as short as five years, after which the loan reverts to a variable rate.

In an ARM, the interest rate will periodically (annually or even monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain.

A partial amortization or balloon loan is similar to a FRM, but the balance is due at some point short of the full term.

Other loan types:

• term loan or interest-only loan
• equity loan
• blanket loan
• package loan
• wraparound mortgage
• seasoned mortgage
• reverse mortgage
• budget loan
• deed of trust
• bridge loan

Islamic mortgages

Islamic Sharia law prohibits the payment or receipt of interest, which means that practising Muslims cannot use conventional mortgages. However, real estate is far too expensive for most people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.

An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price.

In the United Kingdom, HSBC was the first major bank to offer Islamic mortgages.

See also

Deed, pre-qualification, pre-approval, VA loan, FHA loan

External links

• Consumer Handbook on Adjustable Rate Mortgages (US Federal Reserve) (PDF)
• Mortgage Calculator with dynamic diagrams . This mortgage calculator can be used to figure out monthly payments of a home mortgage loan. It factors in PMI (Private Mortgage Insurance), town property taxes, and their effect on the total monthly mortgage payment. The calculations are visualized with the aid of two diagrams, displaying the remaining balance and monthly paid interest vs. monthly paid principal respectively, both on a month/money coordinate system.