What is a Mortgage?
Mortgage is a financial loan that allows people to buy and own homes without having to pay the full purchase price upfront. When you take out a mortgage, you promise to repay the lender with monthly payments that include both principal and interest. If you fail to make your payments, the lender can take ownership of your home and sell it to recoup its losses. This differs from personal loans, which are typically unsecured.
There are several parties involved in a mortgage transaction, including the mortgage lender, the borrower and possibly a co-signer. Mortgage lenders are banks, credit unions and other financial institutions that lend money to people buying homes. When you apply for a mortgage, the lender will review your financial and credit history to determine whether you qualify for the loan. This process is called underwriting. Mortgage underwriting also involves checking your income and debt to ensure that you can afford the loan payments.
The mortgage lender will require that you sign a promissory note, which states your agreement to repay the loan. The lender will also put a lien on your property (a legal claim to the property that gives it priority over other creditors) as security for the mortgage loan. The lien is recorded in the public records where your property is located.
Mortgages have different forms in different jurisdictions, and these form variations can impact the operation of mortgage markets. Some mortgages are backed by real estate, while others may be secured by other assets such as securities. In some jurisdictions, mortgage lending is regulated by law or through the financial markets.
Most countries have developed robust domestic mortgage markets. A large part of these markets are funded through the banking sector, and some are financed through the capital markets using a technique called securitization, where pools of mortgages are bundled into bonds that can be sold to investors.
Many mortgage lenders have different fees and requirements. The types of fees can include application fees, origination fees, and other costs associated with the underwriting and processing of your loan. These fees can add up, and you should carefully compare them when shopping for a mortgage.
Other factors to consider when selecting a mortgage include the interest rate, loan term and the down payment. You should also be aware of any escrow accounts or homeowners insurance required by your mortgage, and occupancy requirements (e.g., that you occupy the mortgaged property as your primary residence). You should also be aware of any prepayment penalties, which are fees charged for early repayment of your mortgage.
In the United States, there are three different legal theories of mortgages: title theory, lien theory and intermediate theory. Each of these theories provides a unique interpretation of the operation of mortgages in different jurisdictions. For example, under the title theory of mortgages, a mortgage transfers legal ownership of a property from the borrower to the mortgagee with the express stipulation that the right of foreclosure in the collateralized property is reserved to the mortgagee.