Mortgages

By:    Updated: December 14,2016

A mortgage is a debt instrument, secured by the collateral of specified real estate 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 real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrowers repay the loan, plus interest, until they eventually own the property free and clear.

Mortgage Loans

A mortgage loan is a loan secured by a transfer of an interest in property to a lender in order to secure the debt. You can take out a mortgage loan on a property you own, or you can take out a mortgage loan to buy the property in the first place. The common factor is that they are both secured by your property.

Fixed-rate Mortgage and Mortgage Refinancing

Mortgages come in many forms. With a fixed-rate mortgage, the borrower pays the same interest rate for the life of the loan. Her monthly principal and interest payment never change from the first mortgage payment to the last. Most fixed-rate mortgages have a 15- or 30-year term. If market interest rates rise, the borrower's payment does not change. If market interest rates drop significantly, the borrower may be able to secure that lower rate by refinancing the mortgage.

Adjustable-rate Mortgage

With an adjustable-rate mortgage, the interest rate is fixed for an initial term, but then it fluctuates with market interest rates. The initial interest rate is often a below-market rate, which can make a mortgage seem more affordable than it really is. If interest rates increase later, the borrower may not be able to afford the higher monthly payments. Interest rates could also decrease, making an ARM less expensive. In either case, the monthly payments are unpredictable after the initial term.

Foreclosure

A mortgage is a pledge to offer property as collateral when taking out a loan. When you are unable to repay the loan, then the collateral is due to be foreclosed by the lender. You will be notified of the foreclosure on the collateral when you fail to meet the terms of the loan. For example, a home buyer pledges his/her house to the bank in a residential mortgage. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.

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Sources
  • https://en.wikipedia.org/wiki/Mortgage_loan
  • http://www.investopedia.com/terms/m/mortgage.asp
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