Loans description
A mortgage is a method of using
property (real or personal) as security for the payment
of a debt.
The term mortgage (from Law French, lit. death vow)
refers to the legal device used in securing the
property, but it is also commonly used to refer to the
debt secured by the mortgage.
In most jurisdictions mortgages are strongly associated
with loans secured on real estate rather than other
property (such as ships) and in some cases only land may
be mortgaged. Arranging a mortgage is seen as the
standard method by which individuals or businesses can
purchase residential or commercial real estate without
the need to pay the full value immediately.
In many countries it is normal for home purchase to be
funded by a mortgage. In countries where the demand for
home ownership is highest, strong domestic markets have
developed, notably in Great Britain, Spain and the
United States.
Creditor
The creditor has legal rights to the debt secured by the
mortgage and often make a loan to the debtor of the
purchase money for the property. Typically, creditors
are banks, insurers or other financial institutions who
make loans available for the purpose of real estate
purchase.
A creditor is sometimes referred to as the mortgagee or
lender.
Debtor
The debtor or debtors must meet the requirements of the
mortgage conditions (and often the loan conditions)
imposed by the creditor in order to avoid the creditor
enacting provisions of the mortgage 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.
A debtor is sometimes referred to as the mortgagor,
borrower, or obligor
Other participants
Due to the complicated legal exchange, or conveyance, of
the property, one or both of the main participants are
likely to require legal representation. The terminology
varies with legal jurisdiction; see lawyer, solicitor
and conveyancer.
Because of the complex nature of many markets the debtor
may approach a mortgage broker or financial adviser to
help them source an appropriate creditor typically by
finding the most competitive loan. Recently, many
consumers (particularly higher income borrowers) are
choosing to work with Certified Mortgage Planners,
industry experts that work closely with Certified
Financial Planners to align the home finance position(s)
of homeowners with their larger financial portfolio(s).
The debt is sometimes referred to as the hypothecation,
which may make use of the services of a hypothecary to
assist in the hypothecation.
Other Terminologies
Like any other legal system, mortgage has several
jargons that may confuse some people. Below are several
mortgage terminologies explained in brief for better
understanding.
Advance This is the money you have borrowed plus all the
additional fees.
Base Rate In UK, this is the base interest rate set by
the Bank of England.
Bridging Loan This is a temporary loan that enables you
to purchase your new property before you are able to
sell your old property.
Conveyance This is the legal document that transfers
ownership of unregistered land to you.
Disbursements These are all the fees of your solicitors,
such as stamp duty, land registry, search fees, etc.
Early Redemption Charge / Pre-Payment Penalty /
Redemption Penalty This is the amount of money you have
to pay if you pay your mortgage in full before the time
finished.
Equity This is the amount of your property in the market
minus all loans that it has.
Freehold This means the ownership of a property and the
land.
Land Registration This is a legal document that records
the ownership of a property and land.
Legal Charge This is a legal document that records the
data of the rightful owner of a property or land.
Mortgage Deed This is a legal document that stated that
the lender has a legal charge over your property.
Mortgage Payment Protection Insurance This is the
insurance that insures your mortgage payment arrives on
time in case you are unable to pay your mortgage.
Sealing Fee This is a fee made when the lender releases
the legal charge over your property.
Subject To Contract This is an agreement between seller
and buyer before the actual contract is made.
Legal Aspects
There are essentially three types of legal mortgage.
Mortgage by demise
In a mortgage by demise, the creditor becomes the owner
of the mortgaged property until the loan is repaid in
full (known as "redemption"). This kind of mortgage
takes the form of a conveyance of the property to the
creditor, with a condition that the property will be
returned on redemption.
This is an older form of legal mortgage and is less
common than a mortgage by legal charge. It is no longer
available in the UK, by virtue of the Land Registration
Act 2002.
Mortgage by legal charge
In a mortgage by legal charge, the debtor remains the
legal owner of the property, but the creditor gains
sufficient rights over it to enable them to enforce
their security, such as a right to take possession of
the property or sell it.
To protect the lender, a mortgage by legal charge is
usually recorded in a public register. 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 there are no
mortgages already registered on the debtor's property
which might have higher priority. Tax liens, in some
cases, will come ahead of mortgages. For this reason, if
a borrower has delinquent property taxes, the bank will
often pay them to prevent the lienholder from
foreclosing and wiping out the mortgage.
This type of mortgage is common in U.S. and, since 1925,
it has been the usual form of mortgage in England and
Wales (it is now the only form - see above).
In Scotland, the mortgage by legal charge is also known
as standard security.
See also: Security interests - types of security
History
At common law, a mortgage was a conveyance of land 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 not met ---
usually, but not necessarily, the repayment of a debt to
the original landowner. Hence the word "mortgage," Law
French for "dead pledge;" that is, it was absolute in
form, and unlike a "live gage", was not conditionally
dependent on its repayment solely from raising and
selling crops or livestock, or of simply giving the
fruits of crops and livestock coming from the land that
was mortgaged. The mortgage debt remained in effect
whether or not the land could successfully produce
enough income to repay the debt. In theory, a mortgage
required no further steps to be taken by the creditor,
such as acceptance of crops and livestock, for
repayment.
The difficulty with this arrangement was that the lender
was absolute owner of the property and could sell it, or
refuse to reconvey it to the borrower, who was in a weak
position. Increasingly the courts of equity began to
protect the borrower's interests, so that a borrower
came to have an absolute right to insist on reconveyance
on redemption. This right of the borrower is known as
the "equity of redemption".
This arrangement, whereby the mortgagee (the lender) was
on theory the absolute owner, but in practice had few of
the practical rights of ownership, was seen in many
jurisdictions as being awkwardly artificial. By statute
the common law position was altered so that the
mortgagor would retain ownership, but the mortgagee's
rights, such as foreclosure, the power of sale and the
right to take possession would be protected.
In the United States, those states that have reformed
the nature of mortgages in this way are known as lien
states. A similar effect was achieved in England and
Wales by the Law of Property Act 1925, which abolished
mortgages by the conveyance of a fee simple.
In the United States, mortgages became widely used
starting in 1934. In that year, the Federal Housing
Administration (FHA) lowered the down payment
requirements by offering 80% loan-to-value loans. Next,
banks, insurance companies, and other lenders followed
the example. The FHA also lengthened loan terms by first
introducing 15-year loans to supplant 3, 5, and 7-years
loans which ended with a balloon payment. Until the
1930s only 40% of U.S. households owned homes; the rate
today is nearly 70%. In 2003, total U.S. residential
mortgage production reached a record level of $3.8
trillion through record low interest rates (though these
continue to vary according to credit rating.)
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