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Mortgage
A mortgage is the transfer of an
interest in property (or the equivalent in law - a charge) to a lender
as a security for a debt - usually a loan of money. While a mortgage in
itself is not a debt, it is the lender's security for a debt. It is a
transfer of an interest in land (or the equivalent) from the owner to
the mortgage lender, on the condition that this interest will be
returned to the owner when the terms of the mortgage have been satisfied
or performed. In other words, the mortgage is a security for the loan
that the lender makes to the borrower.
The term comes from the Old French "dead pledge," apparently meaning
that the pledge ends (dies) either when the obligation is fulfilled or
the property is taken through foreclosure.
In most jurisdictions mortgages are strongly associated with loans
secured on real estate rather than on other property (such as ships) and
in some jurisdictions only land may be mortgaged. A mortgage is the
standard method by which individuals and businesses can purchase real
estate without the need to pay the full value immediately from their own
resources. See mortgage loan for residential mortgage lending, and
commercial mortgage for lending against commercial property.
The cost to the borrower is measured by the annual percentage rate
(APR), which is an effective annual rate of interest and fees paid by
the borrower.
In many countries, though not all (Bali, Indonesia is one exception), it
is normal for home purchases to be funded by a mortgage. Few individuals
have enough savings or liquid funds to enable them to purchase property
outright. In countries where the demand for home ownership is highest,
strong domestic markets have developed, notably in Ireland, Spain, the
United Kingdom, Australia and the United States.
Participants and variant terminology
Legal systems in different countries, while having some concepts in
common, employ different terminology. However, in general, a mortgage of
property involves the following parties.
Mortgage lender
Mortgagee is a party to whom property is mortgaged, usually a
lender. Mortgage provides security to the lender. Given the large sum of
money involved in financing a property, a mortgage lender will usually
want security for the loan that will provide a claim upon that security
and will take precedence over other creditors. A mortgage accomplishes
this security.
The lender loans the money and registers the mortgage with the title to
the property. The borrower gives the lender the mortgage as security for
the loan, receives the funds, makes the required payments and maintains
possession of the property. The borrower has the right to have the
mortgage discharged from the title once the debt is paid. If the
mortgagor fails to repay the loan according to the conditions set forth
by the lender, then the mortgagee reserves the right to foreclose on the
property.
Borrower
Mortgagor is a party who mortgages property. A mortgagor owes the
obligation secured by the mortgage. Generally, the debtor must meet the
conditions of the underlying loan or other obligation and the conditions
of the mortgage. Otherwise, the debtor usually runs the risk of
foreclosure of the mortgage by the creditor to recover the debt.
Typically the debtors will be the individual home-owners, landlords or
businesses who are purchasing their property by way of a loan.
Most buyers of real property would have difficulty saving enough money
to make an outright purchase of real estate. The use of debt increases a
buyer's ability to buy through a combination of down payment and debt.
As a result a real estate transaction seldom occurs without buyers
relying on borrowed funds.
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Borrowing for investment purposes
Aside from the absence of large amount of available money, there are
several reasons why an investor (including a buyer of real estate) might
borrow funds. Some of these include:
To diversify investments and reduce overall risk by using only part of
the available funds for any one investment. However the mortgage loan
enables him to purchase more assets than he would otherwise been able
to, and therefore in general increases investment risk rather than
reducing it.
To invest the borrowed funds at a higher rate of interest (yield) than
the borrowing rate; for example, a sum is borrowed at an annual interest
rate of 7% per year and used to invest in a project that returns 10% per
year. This is likely to be speculative and there is usually a
possibility that the project may turn out to return less than 7% per
year or to lose money.
To free up equity for other purposes; for example, a commercial
enterprise may prefer to use funds to purchase inventory or equipment
instead of investing only in land and buildings.
To obtain a tax benefit. In some countries (such as Canada), mortgage
interest is not tax deductible, but loans made for investment purposes
are. low cost Liability Insurance |
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