A 'mortgage' is the transfer of an interest in property (or in law the
equivalent - 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 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 of the real estate 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.[{{cite book
|first=Edward|last=Coke|authorlink=Edward Coke |title=Commentaries on the Laws
of England |quote=[I]f he doth not pay, then the Land which is put in pledge
upon condition for the payment of the money, is taken from him for ever, and so
dead to him upon condition, &c. And if he doth pay the money, then the pledge is
dead as to the Tenant}}] In most jurisdictions mortgages are strongly associated with loans secured on
real estate rather than other property (such as ships) and in some jurisdictions
only land may be mortgaged. Arranging a mortgage is seen as the standard method
by which individuals and businesses can purchase residential and commercial real
estate without the need to pay the full value immediately. See mortgage loan for
residential mortgage lending, and commercial mortgage for lending against
commercial property. The measurement of a mortgage with regards to cost to the borrower can be
measured by Annual Percentage Rate (APR) or many other formulas for true cost
such as Lender Police Effective Annual Rate (LPEAR). In many countries it is normal for home purchases to be funded by a mortgage. In
countries where the demand for home ownership is highest, strong domestic
markets have developed, notably in Spain, the United Kingdom, Australia and the
United States. Participants and variant terminology Legal systems, while having some concepts
in common, employ different terminology. However, in general, a mortgage of
property involves the following parties. Mortgage lender Mortgagee is the legal term for the mortgage lender. The main function of the
mortgage is to provide 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 against 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 the legal term for the borrower, who owes the obligation secured by
the mortgage, and may be multiple parties. 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 borrowers relying on borrowed funds. =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 *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%
and used to invest in a project that returns 10% *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. Other participants Because of 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. The debt is, in civil law jurisdictions, referred to as hypothecation, which may
make use of the services of a hypothecary to assist in the hypothecation.
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