MORTGAGE

Also known as a mortgage loan. It is a temporary, legal agreement destined to finance the purchase of real estate, usually with specified payment periods and interest rates. Its owner (mortgager) gives the lender (mortgagee) which is normally a bank, a right to dispose of the property (lien) as secured collateral for the loan. Mortgages have a rate of interest, standard procedures, and a reasonably long repayment period. The document by which this arrangement is effected is called a mortgage bill of sale. Mortgages are also known as «liens against property» or «claims on property.»

Mortgage loans are used to purchase real estate without paying the entire value up front. The mortgage loan is a loan secured by real estate property through the use of a mortgage note which provides evidence for the existence of the loan and the obligation to repay. The word mortgage alone is most often used to refer to mortgage loan. In a residential mortgage, a home buyer pledges his or her house to the bank and, in case the home buyer defaults on paying the established fee for a certain period of time, the bank can claim the house, evict the tenants and sell it. With the income from the sale the bank clears the mortgage debt. To be legally achievable, the mortgage must be set for a definite period, and the mortgagor must have the right to buy back (right of redemption) its property before the end of that period. Any legally owned property can be mortgaged, although real estate property (land and buildings) are the most common. When personal property is mortgaged, such as cars, jewelry, etc., it is called a chattel mortgage. The factors that define a mortgage are; the interest, which may be either fixed for the life of the loan or variable (changed at certain pre-defined periods), a maximum term (the amount paid each period) and the frequency of payment. There are basically two types of mortgages:

  1. Fixed rate mortgage: the loan has a fixed rate for the entire term of the loan with the advantage that the mortgagor can pre-define a budget knowing the fixed cost. Also called conventional mortgage.
  2. Adjustable/variable rate mortgage: the loan has an interest rate periodically adjusted based on an index.

The mortgagor is protected by a maximum interest rate, called ceiling, which might be reset annually. This mortgage usually starts with a better rate than the previous type of mortgage in order to compensate the mortgage holder for the future possible risk originated from the rate fluctuations.