WHAT IS A MORTGAGE?

WHAT IS A MORTGAGE?

To define simply, a mortgage is a legal agreement between the lender and the borrower wherein the borrower who avails of the loan to buy an asset or property such as a house, commits to pay back the money according to the agreed terms and conditions. It conveys that the borrower only has conditional right of ownership on the property until the money borrowed, including all related fees are paid off completely to the lender. Mortgages are also usually called “claims on property” or “liens against property”.

The most common assets mortgaged are real estate properties such as lots, houses, and buildings. For personal properties such as cars, jewelries, appliances, etc, the mortgage is called a chattel mortgage. It allows borrowers (either individuals or businesses) to purchase real estate and other properties without having to pay the entire value of the property upfront.  Mortgage is a way of security for the lender that the money he or she lends to the borrower, together with the interest, will be paid in full over the agreed period of time. Mortgages are recorded in the register of title documents, thus making it public information that will be voided after the loan is completely repaid.

There are two main forms of mortgages. A more traditional form of mortgage is the fixed-rate mortgage where the borrower pays the same interest rate all throughout the loan term. This means that the monthly principal and interest payment done by the borrower does not change from the first payment to the last. The payment will be independent from the change in market interest rates, thus it will not change even if market interest rates rise or fluctuate.

Another common form is the adjustable-rate mortgage (ARM) where the interest rate is only fixed for an initial term, but will change for the remainder of the term according to the change in market rates. Thus, if market interest rates go up, the borrower pays higher interest as well, but if the market rates drop, the borrower enjoys the benefit of lower payments compared to a fixed-rate mortgage.

David Meadows

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To define simply, a mortgage is a legal agreement between the lender and the borrower wherein the borrower who avails of the loan to buy an asset or property such as a house, commits to pay back the money according to the agreed terms and conditions.

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