What is a Mortgage?

A Mortgage is a legal agreement that conveys conditional right of ownership of an asset or property by its owner to a lender as security for a loan. Mortgage is also known as lien against property or claims on property. It is a debt instrument which is secured by the collateral of specified real estate property that the borrower is expected to payback with a predefined set of payments.

Large real estate purchases are carried on by individuals and businesses by mortgaging wherein they do not pay the entire value of the purchase up front. Over the period of time, the borrower repays the principle amount as well the interest until the property is finally cleared of the loan. In case the borrower is unable to pay the mortgaged amount, the bank reserves the right to foreclose the deal.

Breaking down Mortgages

Mortgages are of various kinds. Some common kinds of mortgage are:

Residential Mortgage A home owner pledged his house to the bank. The bank holds the right to claim the house if the buyer of the hose defaults on paying the mortgage. In case of afore closure, the bank can evict the tenants and sell off the house. They can thereon use the income from the sale to clear the debt.

Fixed rate mortgage or traditional mortgage The borrower pays the same interest rate for the life of a loan. The monthly principle and interest payment do not change from the first to the last payment, they remain static. Most fixed rate mortgages are for a term of 15-30 years and assure the borrower the same payment even if the interest rates in the market rise. If the interest rates on the market drop, the borrower can secure a lower rate by refinancing the mortgage.

Adjustable rate mortgage The interest rate is fixed for an initial term, but fluctuates with market interest rates. The initial interest rate is often below the market rate that makes the mortgage seem more affordable. If interest increases later, the borrower may not be able to afford the higher monthly payments. Interest rates usually decrease making ARM less expensive. The monthly payments in either of the cases are unpredictable after the initial term.

Other types of mortgages include interest only mortgages, payment option ARMs that are best suited for sophisticated borrowers.

Further Reading

  • Costly external finance, corporate investment, and the subprime mortgage credit crisis – [PDF]
  • Financing social reproduction: The gendered relations of debt and mortgage finance in twenty-first-century America – [PDF]
  • The interaction between mortgage financing and housing prices in Greece – [PDF]
  • The evolving role of technology in mortgage finance – [PDF]
  • The financialization of everyday life or the domestication of finance? How mortgages engage with borrowers’ temporal horizons, relationships and rationality in … – [PDF]
  • Mortgage market design – [PDF]
  • Inattention and inertia in household finance: Evidence from the Danish mortgage market – [PDF]
  • Post-socialist housing meets transnational finance: Foreign banks, mortgage lending, and the privatization of welfare in Hungary and Estonia – [PDF]
  • Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? Or is it the result of attempting to securitize illiquid noncommercial mortgage … – [PDF]
  • What” triggers” mortgage default? – [PDF]

    Is it possible to refinance an adjustable rate mortgage (ARM)?

    Yes, it is possible to refinance an ARM in order to secure lower interest rates in case market rates drop below those offered by your current lender.

    Are there different kinds of mortgages?

    Yes, there are different kinds.

    What is a mortgage?

    A mortgage is a legal agreement that conveys conditional right of ownership of an asset or property by its owner to a lender as security for a loan.

    What are some common types of mortgages?

    Some common types include residential mortgages and fixed rate mortgages.

    Do Canadians have more debt than ever before ?

    According to Statistics Canada , Canadian household debt reached $1 trillion dollars for first time ever last year .

    How do you pay off your mortgage?

    You pay off your mortgage by repaying the principle amount as well as interest over time until the property is finally cleared of the loan. In case you fail to pay back, the bank reserves the right to foreclose on your deal and claim possession of your house if applicable.

    Who regulates Mortgages in Canada ?

    The Office of Superintendent Financial Institutions (OSFI) regulates all financial institutions including banks and trust companies that offer mortgages in Canada .

    What does the word ''mortgage'' mean?

    The word ''mortgage'' means death pledge.

    Can you get rid of your mortgage early if you want to sell your home before paying off all loans?

    Yes, but this will require paying extra fees called prepayment penalties which can be substantial depending on how much time remains on the loan and how much money has already been paid towards principal and interest payments .