Mortgage Basics

Understanding the intricacies of mortgages is very important if you possess or desire to possess a real estate. The fact is that for commoners like us, the subject of mortgage is packed with terminologies and weighed down with economic hazards. It is important to be cautious while dealing with mortgages for any wrong choice may lead to great financial losses for you. It would be like throwing away your hard earned money which could have been otherwise utilized more purposefully for the higher education of your children or even during your retirement period. Hence, it is always advisable to exercise caution and prudence while dealing with mortgages.

For any common home owner who has taken a property on mortgage, the monthly expenses in this regard are very high. Normally, the mortgage payment every month happens to be their single largest expense and if not, after deduction of income taxes, it is always the second largest expense for the archetypal home owners. In addition, when you are looking for a mortgage, it may prove to be a waste of your valuable time as well as an economic thrashing provided you don't avail a suitable loan to acquire the mortgage.

Can you guess what people normally look for first when they consider shopping for a mortgage? Well, it is nothing, but the interest rate. And this is a sensible thing to do as no one will be willing to pay anything extra for a mortgage than the bare essential. Hence, it is pertinent that the interest rate should get top priority when anyone begins to plan shopping for a mortgage. Since it is the most important aspect of any mortgage, it should come first and not at the end.

Now, if you find that the interest rates of all the mortgages are similar, do you need to look for anything else while shopping for a mortgage? The answer to this question is affirmative as you should bear in mind that all mortgages are not created equivalent. In fact, the mortgage packages differ depending on the lender and it has been seen that no two lenders ever offer matching mortgage packages, including the features and choices. When you find that there is no variation in the interest rates of different mortgage packages, you need to carefully and cautiously check the other distinctive aspects while applying for a mortgage loan. In fact, the resemblance of the interest rates can only be out done by the assortment of features available on a given day.

What is interesting to note is that never before did the housing mortgage lenders have so many products to offer. Today they have the opportunity to choose from an assortment of products and they are so many that it often becomes confusing as well as tricky to select the right thing. They are really at their wit's end to find out which features are really good and which are camouflaging. At the same time, it is really difficult to select the alternative that will help the borrower to save money and not benefit the lender. While making your choice remember that though certain aspects may not appear to be good or beneficial today, they may turn out to be very useful and money savers in the times to come. So, don't haste, take your time to make the right decision.

It is common knowledge that every lender will do his best to present his mortgage package as the 'best deal for the borrower'. So, don't get lured away by what the lender promotes. With so much money at stake, you simply cannot afford to make any mistake. In case you take a wrong step, you may soon get disillusioned with the mortgage offers. Basically, you need to look for four most important things while shopping for a mortgage. First of all, you need to try to find a mortgage package that puts forward a very relaxed or liberal prepayment privileges. Next, search for choices and aspects that offer utmost suppleness in terms of recharge the loan or selling the house. While shopping for a mortgage it is also important to rummage around for a mortgage that proffers the lowest feasible interest rates along with minimum hidden costs. Finally, it is advisable to find a lender whose mortgage package best manifests your distinctive conditions.

All said and done, while shopping for a mortgage package it is essential that the mortgage borrowers become knowledgeable consumers. They should be aware of the advantages and disadvantages of mortgage shopping and then carefully shop for the characteristics that comprise a perfect mortgage package. In simple words, if you want to play a game, it is necessary that you know the rules well.

In simple words, a mortgage is a legal bond among a lender (the mortgagee) and a borrower (the mortgagor). In fact, the mortgage is collateral provided by the borrower to the lender. In addition, the mortgage is recorded against the possession of the property at a suitable land registration office to ascertain the lender's lawful claim for the money he loans to the borrower. In return, the lender loans the borrower an agreed sum of money known as the principal. Normally, the lender also collects an interest amount from the borrower for utilizing the money taken on loan. In addition, the borrower is also expected to make regular repayments to the lender against the principal received by him or her. These accepted repayments gradually reduce the principal amount and the remaining loan is known as balance or outstanding balance. In simple words, this is the remaining money that the borrower owes to the lender.

Before signing the mortgage document, the lender and the borrower concur on the repayment schedule of the borrower and this is specifically mentioned in the mortgage contract. The 'term' mentioned in the mortgage document refers to the period for which the mortgage loan will remain effective. Although most money lenders do not tender the absolute variety of term preferences, normally, the term may extend from six months to even 30 years. If the entire balance is not cleared or paid off by the borrower in one term, the mortgage agreement is renewed for one or more terms till the outstanding balance is cleared. In some cases, the mortgage contract is refinanced with new terms and conditions until the period the balance is cleared by the borrower. On the other hand, once the total principal along with the due interest has been paid in full, the borrower has the right to release the mortgage or the lender's claim from the title or his property ownership registration. Simply speaking, the mortgage ends once the outstanding balance is paid in full.

In other words

Any mortgage contract comprises two sides - the borrower, also called the mortgagor, and the lender, known as the mortgagee. The two parties sign a legal deal whereby the borrower receives an pre-arranged amount of money in lieu of temporarily giving up the ownership right on his property to the lender as a security for the money being lent. In case, the mortgagor fails to repay the principal amount and the due interest on the money within a specific period or term, he or she may lose the ownership right of the property to the lender or mortgagee.

It must be noted here that the mortgagee may be a bank, a financial institution, a trust company, an insurance firm, a private investor group or even individual lending money in lieu of a security in the form of ownership rights of the borrower's property. At the same time, the mortgagee or the lender may also represent agents or mediators, dealer or broker or mortgage brokers who trade the lender's mortgage under their personal business brands in return for a commission or charge. However, these agents or brokers are not employees of the lender, but independent businesspersons. The lenders or mortgagees often use their personal funds or those deposited by the investors.

Every mortgage contract recognizes the mortgagor or borrower as well as the lender or the mortgagee. In addition, the mortgage contract specifies in detail the unique terms and conditions of each agreement between the lender and the borrower. In addition to specifying the unique contractual relation between the two parties, the mortgage contract also clearly spells out the rights and responsibilities of both the parties.

It may be underlined here that all mortgages make cash available to the borrower at a specific cost or charge. The expenses of the borrower or mortgagor comprise the lender's expenditures in establishing, managing and ultimately carrying out the mortgage. The borrower's expenses also include the rate of interest taken by the lender against the outstanding balance on the principal amount.

In order to ascertain the maximum size of a mortgage, the lender hires a property evaluator at the cost of the borrower. On his part, the evaluator assesses the lending amount against the property. In other words, he fixes the maximum amount that the lender may loan securely against the borrower's property. Simply speaking, the lending value is the actual worth of the mortgaged property that the lender may expect to get in case he needs to sell off the property hurriedly. In case the borrower turns out to be a defaulter owing to non-payment of the principal amount as well as the interest, it may become necessary for the lender to liquidate the property and sell it quickly to recover his loaned amount. Normally, the lending value is considered to be 100 per cent of the value or worth of the property as viewed from the mortgagee's outlook. Once the lending value is fixed, mortgagees or lenders will offer the borrower cash equivalent to a sum ranging between 50 per cent and 75 per cent of the total value of the property.

It is important to remember that the lending value fixed by the lender is always less than the current market value. The market value is the highest amount any buyer would be willing to pay for the property in an aggressive market. Hence, the best way to get the maximum market value for a property is to keep it open for potential buyers for a considerable period of time, before actually selling of the property. This will enable the seller to judge the prices and eventually select the highest bid.

Evaluators are qualified experts who proffer specialized services to assess the value of any property. They are also registered by the Government and have licenses to perform their job. In their appraisal reports, the evaluators also mention in detail the nature and state of the property with a view to enable the lenders to ascertain whether the property fulfills their mortgage requirements. For instance, even if a property is large and well located, its lending value would drop considerably if it is found to be in a state of disrepair. Hence, the lender may withhold a part of the mortgage funds till the necessary repairs are complete with a view to safeguard his interests.

Every mortgage is recorded against the possession rights of the property to safeguard the lender's investment. In fact the mortgage is recorded with the local land registry office with a view to ensure that the borrower cannot sell the property to a third party before repaying the entire mortgage principal amount and interest to the lender. In order to be able to sell the property to any other person, the borrower or mortgagor first needs to settle his dues with the lender or mortgagee. However, once the borrower has repaid the entire principal amount and also cleared the interest dues, the borrower is free to legally release the mortgage so that the lender has no further rights on the property. In such a situation, the property is considered to be free and clear of mortgage loans. All the equity or ownership rights on the property now is vested with the original owner and he is free to use the property at his will or even sell it off, unless there are other creditors staking their claims on the same property.

You must always remember that each mortgage contract is distinctive and different from the others. In fact, the mortgage contracts differ from one another depending on the borrower or mortgagor, the lender or mortgagee, the property that is put on mortgage, and also the terms and conditions mentioned in each of these legal bonds.

Every mortgage comprises of four fundamental constituents:

Generally speaking, all mortgages can be very confusing and hence many things depend on the kind and terms of the mortgage you are opting for. The various types of mortgages accessible to home buyers include:

While signing a mortgage bond, the borrower or mortgagor makes certain promises or legally binding pledges to the lender to make the latter feel assured that his investment is safe. A mortgage contract may comprise any or all of the covenants or the legal responsibilities of the borrower mentioned below:

  • preserve the property mortgaged in good condition and repair it whenever necessary;
  • maintain the insurance of the property in good status and always keep it up-to-date;
  • pay the property taxes regularly and not fall a defaulter;
  • pay the condominium (a property containing condominium apartments) fees if it is applicable;
  • pay back the principal amount on time and the interest due to the lender.

Similarly, the mortgage document or contract provides the lender or the mortgagee specific legal rights. Once the lender has loaned the agreed sum to the borrower, after signing the mortgage contract, he or she has the right to enter and scrutinize the property, make necessary arrangements for repairs if required, and also include the cost of undertaking the repairs to the debt taken against the mortgage of the property. The lender is also entitled to pay the insurance premium of the mortgaged property if the sum already paid is deemed inadequate or if the insurance policy lapses; and includes the insurance cost to the mortgage debt.

In addition, the mortgagee is also given the right to pay the taxes of the mortgaged property in case there are any dues and also add this cost to the mortgage debt taken by the borrower. The lender is also entitled to initiate legal action against the borrower and claim the loan given against the mortgage in case any of the terms and conditions in the mortgage agreement is broken by the borrower.

It may be noted here that though the mortgage agreement grants the lender several rights and powers, the lender or mortgagee does not get hold of the possession rights of the property just by signing the mortgage contract. Even when a person mortgages his property whether through the traditional mortgage or the reverse mortgage, the borrower retains the ownership rights over his property. As long as the borrower maintains the terms and conditions mentioned in the mortgage contract and upholds the spirit of the agreement, he or she keeps the ownership rights of the property.

However, if the borrower breaks even one of the terms and conditions mentioned in the mortgage contract - irrespective of its kind, the regional mortgage laws grant the lender the privilege to initiate legal action to collect the debt given to the borrower. For example, with certain limitations, the mortgage contract empowers the lender to sell the mortgaged property after gaining its possession. What is important to note in this case is that the lender does not become the owner of the mortgaged property, but just gains the legal right to sell it off after acquiring its possession. And he may utilize the proceeds from the sale of the property to recover the debt due to him. The excess money obtained from the sale goes to the borrower. However, the responsibility of the borrower does not end with the sale of the property. In case the sale does not yield enough money to clear the outstanding debt, the borrower has to arrange for the remaining sum.

In fact, the existing law protects the lender in several ways and ensures that he does not lose his investment. The law provides the lender the scope to initiate legal action for foreclosure to recover his debt. In simple terms, foreclosure is a measure whereby a lender may initiate legal action to acquire the ownership of the mortgaged property through the courts. Well, the borrower retains his right of ownership of the property as well as the right to pay off the debt until the lender has completed all the legal proceedings against the borrower or mortgagor. In such a situation, the borrower also retains the right maintain the terms and conditions of the mortgage agreement or even sell of the property to clear the debt against mortgage.

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