Mortgage is an age-old phenomenon. Mortgage refers to the method by which individuals or businesses can buy residential or commercial property without paying the full value upfront. The borrower or the mortgager uses a mortgage to pledge real property to the lender or mortgages as security against the debt for the rest of the value of the property.
In most jurisdictions mortgages are closely associated with loans secured on real estate rather than property such as ships, vessels etc. while at some places only land can be mortgaged. Arranging a mortgage is seen as the standard method by which people can purchase residential or commercial real estate without the need to pay the full value at that very time.
In several countries home purchase being funded by a mortgage is very common and normal. Moreover in countries such as Great Britain, Spain, United States of America etc. where the demand for homeownership is highest, strong domestic markets have developed.
Basically there are two types of legal mortgage:
· First is the mortgage by demise in which the creditor becomes the owner of the mortgaged property till the loan is repaid completely. This type of mortgage assumes the form of a conveyance of the property to the creditor, on the grounds or assurance that the property will be returned on the redemption. Mortgage by demise has become quite old and is rarely found nowadays. Countries like UK have abolished this mortgage.
· Second mortgage is the mortgage by legal charge. In this mortgage the debtor remains the legal owner of the property but the creditor too acquires requisite rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it. The mortgage by legal charge is saved recorded in a register fir the safety of the lender.
Prior to giving the loan, the mortgage lender or the lending organization usually make a complete survey of the status of the person who is seeking mortgage. If other mortgages are already registered in front of the name of that person or if has delinquent property taxes, the mortgage becomes a difficult case.
In United States of America there are different types of mortgage loans. These are broadly divided into two: the fixed rate mortgage (FRM) and the adjustable rate mortgage (ARM).
In FRM the interest rate and the monthly payments do not change till the time you pay off the loan completely. Americans usually prefer to have a loan for 10, 15, 20 or even 30 years. There is a slight increase in the monthly payments due to increase in property taxes or insurance rates while the payments for the principal and interest will remain static throughout.
In an ARM, the interest rates are fixed only for a certain time period after which they change according to the existing rates in the market and some market index such as Prime Rate, LIBOR, and Treasury Index etc.
ARM transfer part of the interest rate risk from the lender to the borrower. As a result the loans are quite popular in cases where unpredictable interest rates make it difficult to acquire fixed loan. Though there is slight risk involved, yet the savings made through the ARMs make them a viable option for most of the people.
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