What is Mortgage?

Introduction

A mortgage is a loan process where a real or personal property is used for the payment of the debt. The term ‘mortgage’ is connected to French law where the word means a death vow. In current law, the word is used to mean the debt secured by the mortgage. Mortgages are most commonly used for real estate loans.

In the current decades, a mortgage is the most common method by which individuals and companies purchase residences or commercial properties. This eliminates the need to pay the full value of the property on purchase. Home purchase financed by mortgages is a standard practice in countries like Great Britain, United States and Spain.

Commonly Used Terms

A mortgage is a legal contract and different legal systems have different words for the concepts. The important concepts are common for all the legal systems. Let us have a look at some of the crucial terms.

A creditor or lender is the institution or individual who sanctions the loan. The legal contract of the mortgage implies that the lender has legal rights to the debt amount secured by the mortgage. Banks, financial institutions and insurance companies are the common lenders. Another term for creditor is mortgagee .

The debtor or borrower is the individual(s) or company that avails the mortgage loan.The borrower has to meet the criteria set by the lender and meet the requirements of the lender, failing which the lender is entitled to enact the provisions of the mortgage to recover the debt. The borrower is also known as mortgagor or obligor.

The process of mortgages is quite complicated, so both lender and borrower might require legal representation. The legal experts are called lawyers , solicitors or conveyancer .

The borrower might want to take the help of a mortgage broker or financial advisor to find a competitive loan package and a suitable lender.

Repayment

Different countries and legal systems have different methods for repayment of mortgage loan. Here is a quick lowdown.

The most common method is the capital and interest combination . The borrower pays in regular installments that have elements of both the capital and the interest and pays off the loan in a set term. The term of the loan can be anything from ten years to 30 or even 50 years depending on the country and the size and type of the loan.

An interest only mortgage is an alternative method. As the term suggests the capital is not repaid throughout the tenure of the loan in this system. Interest only mortgages are common with regular investment plans in the UK. Here, the borrower goes for a separate investment plan that would repay the mortgage amount upon maturity of the investment term. Sometimes the lender and borrower enter an interest only agreement without any capital repayment investment. In this case, the parties are banking on the property value going up sufficiently. This way, trading the property repays the capital.

In reverse mortgages , a mortgage is arranged in such a way that the borrower does not repay the capital or interest in full till their death. The interest and capital get rolled up with every passing year and the debt goes on increasing.

Another method is the interest and partial capital scheme, where the monthly payments including interest and a percentage of partial capital are paid every month. In the US, the balance amount of capital which is not included in the monthly installment has to be paid at a specified point before the total term concludes. The partial capital method is used in the UK where the mortgage is investment backed.