A mortgage is a legal instrument
that pledges a house or other real estate as security for repayment
of a loan. By providing a guarantee that the loan will be paid
back, a mortgage enables a person to buy property without
having the funds to pay for it outright. If the borrower
fails to repay the loan, the lender may foreclose on the property-that
is, force the sale of the house to recover the amount of the
loan. The mortgage lending process has two instruments, a note
and a mortgage. The note specifies the financial terms of a
loan agreement. The mortgage contains a legal description of
the property and a statement that pledges the property as security
for the loan. However, the word mortgage commonly refers to
both parts of the loan agreement as a whole.
A borrower can obtain a mortgage from
a bank, credit union, or other lender. Most lenders
require the borrower to have a certain amount of money to use
as a down payment toward the purchase of the house. For example,
if an individual wants to buy a home priced at $100,000 and
the lender requires a down payment of $5000, the individual
will apply for a loan of $95,000 to pay for the difference.
A lender requires detailed information
about borrowers to assess their ability and willingness to repay
a loan. For example, a borrower will be asked about
income, employment history, and credit history. The lender will
also inquire about any debts, such as a car loan or credit card
balances.
Before the lender agrees to a loan, an appraisal
of the property by a qualified third party is required. The
appraisal provides an estimate of the property's value. The
lender wants to be certain that the property is worth at least
as much as the loan in case of foreclosure.
If all requirements are met, the lender
agrees to the loan. The loan agreement specifies the
current interest rate and the loan's repayment terms. The terms
of repayment specify how much the regular payments will be,
how frequently they will be made, and over how many years. The
interest rate and the duration, or life, of the mortgage determine
the amount of the payment. Payments are usually made monthly.
The life of the mortgage can be 15, 20, 30, or even 40 years.
To accept the loan the borrowers must
sign a promissory note that obligates them to repay the mortgage
debt. The borrower also promises to keep the property
insured against fire and other hazards, and to pay any property
taxes that may be owed. If the borrower fails to keep any of
these obligations, the loan is considered to be in default,
and subject to foreclosure.