tag:blogger.com,1999:blog-8532011485721981855.post-83540420065836419792007-03-14T18:23:00.000-04:002007-03-14T22:42:09.809-04:00Did you know that the term mortgage (from Law French, lit. death vow) refers to the legal device used in securing the property, but it is also to refer to the debt secured by the mortgage, the mortgage loan?<br />The word "mortgage," Law French for "dead pledge;" that is, it was absolute in form, and unlike a "live gage", was not conditionally dependent on its repayment solely from raising and selling crops or livestock, or of simply giving the fruits of crops and livestock coming from the land that was mortgaged. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock, for repayment.<br />The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it, or refuse to give it to the borrower, who was in a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on possession on redemption. This right of the borrower is known as the "equity of redemption".<br /><br />This arrangement, whereby the mortgagee (the lender) was on theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly artificial. By statute the common law position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale and the right to take possession would be protected.<br /><br /><br />In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as cars) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.<br />It is the most cost effective form of borrowing because the value of the property reduces risk for the lender.<br />Mortgage are generally long-term loans (3-5-7 to 40 years) , the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic require a fixed monthly payment over a period of 10 to 40 years, depending on lenders conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization.<br /><br />Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many cases, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization).<br />Mortgage lending will also take into account the (perceived) friskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recover some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.<br />Upon making a mortgage loan for purchase of a property, lenders usually require that the borrower make a down payment, that is, contribute a portion of the cost of the property. This down payment may be expressed as a portion of the value of the property. The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan where the purchaser has made a down payment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property.<br /><br />The loan to value ratio is considered an important indicator of the friskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.<br />The concept of equity in a property refers to the value of the property minus the outstanding debt, subject to the definition of the value of the property. Therefore, a borrower who owns a property whose estimated value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's equity of $100,000.<br />An option ARM provides the option to pay as little as a 1% interest rate. As a result, the difference between the monthly payment and the interest on the loan is added to the loan principal; the loan at this point has negative amortization. In this respect, an option ARM provides a form of equity withdrawal (as in a cash-out refinancing) but over a period of time.<br /><br />The option ARM gives a number of payment choices each month (for example, 1%, interest only, 30 year fixed rate, 15 year fixed rate). The interest rate will adjust every month in accordance with the index to which the loan is tied. These loans may be useful for people who have a lot of equity in their home and want to lower monthly costs; for investors, allowing them the flexibility to choose which payment to make every month; or for those with irregular incomes (such as those working on commission or for whom bonuses comprise a large portion of income).<br />One of the important features of this type of loan is that the minimum payments are often fixed for each year for an initial term of up to 5 years. The minimum payment may rise each year a little (payment size increases of 7.5% are common) but remain the same for another year. For example, a minimum payment for year 1 may be $1,000 per month each month all year long. In year 2 the minimum payment for each month is $1,075 each month. This is a gradual increase in the minimum payment. The interest rate may fluctuate each month, which means that the extent of any negative amortization cannot be predicted.<br />Option ARM mortgages have been criticized on the basis that some borrowers are not aware of the implications of negative amortization; that eventually option ARMs reset to higher payment levels (to amortize the loan), and borrowers may not be capable of making the higher monthly payments; and that option ARMs have been used to qualify mortgages for individuals whose incomes cannot support payments higher than the minimum level.<br />Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage insurance. There are also settlement fees (closing costs) the settlement company will charge.<br />Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over 75%, and employed in the event of foreclosure and repossession.<br /><br />This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 75%.<br /><br />In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset.<br /><br />I am happy if you find it worth reading. Please visit <a href="http://www.theswissmortgage.com">http://www.theswissmortgage.com</a> if you wish to receive more information about the types of mortgages, conditions or current mortgage rates. In the dictionary you can also find explanation of many mortgage and real estate related terms.Danhttp://www.blogger.com/profile/17924606033023788744noreply@blogger.com