According to Anglo-American property
law, a mortgage occurs when an owner (usually of a fee simple
interest in realty) pledges his interest (right to the property) as
security or collateral for a loan. Therefore, a mortgage is an
encumbrance (limitation) on the right to the property just as an
easement would be, but because most mortgages occur as a condition
for new loan money, the word mortgage has become the generic term
for a loan secured by such real property.
As with other types of loans,
mortgages have an interest rate and are scheduled to amortize over
a set period of time, typically 30 years. All types of real
property can, and usually are, secured with a mortgage and bear an
interest rate that is supposed to reflect the lender's
risk.
Mortgage lending is the primary
mechanism used in many countries to finance private ownership of
residential and commercial property (see commercial mortgages).
Although the terminology and precise forms will differ from country
to country, the basic components tend to be similar:
* Property: the
physical residence being financed. The exact form of ownership will
vary from country to country, and may restrict the types of lending
that are possible.
* Mortgage: the
security interest of lender in the property, which may entail
restrictions on the use or disposal of the property. Restrictions
may include requirements to purchase home insurance and mortgage
insurance) or pay off outstanding debt before selling the
property.
* Borrower: the
person borrowing who either has or is creating an ownership
interest in the property.
* Lender: any
lender, but usually a bank or other financial institution. Lenders
may also be investors who own an interest in the mortgage through a
mortgage-backed security. In such a situation, the initial lender
is known as the mortgage originator, which then packages and sells
the loan to investors. The payments from the borrower are
thereafter collected by a loan servicer.
* Principal: the
original size of the loan, which may or may not include certain
other costs; as any principal is repaid, the principal will go down
in size.
* Interest: a
financial charge for use of the lender's money.
* Foreclosure or
repossession: the possibility that the lender has to foreclose,
repossess or seize the property under certain circumstances is
essential to a mortgage loan; without this aspect, the loan is
arguably no different from any other type of loan.
Many other specific characteristics
are common to many markets, but the above are the essential
features.
