What Exactly is a Mortgage?
A mortgage is the exchange of property or another form of real estate to a lender for security of a debt, usually a loan for a borrower and most often referring to home or commercial loans. The mortgage itself is not a debt, more like an agreement for an exchange of funds between the lender and borrower for the purchase of the aforementioned real estate; the mortgage acts as a security for the loan to help protect the lender in the event that the borrower cannot repay their loan in accordance with the agreed-upon terms.
A mortgage is the standard method for businesses and individuals to purchase real estate, both commercial and residential, without paying the full amount immediately. The costs accrued to the borrower vary and can be measured by the Annual Percentage Rate (APR) — or the amount of interest that will be charged to the borrower per year — as well as any loan origination and document fees and/or appraisal services. Since very few individuals have enough savings or resources to buy real estate outright, it is quite normal for most homes to be purchased using a mortgage.
The mortgage is set up between two main parties — the mortgage lender (or mortgagee) and the borrower. Since the main function of the mortgage is to provide financial security for the lender, the mortgage will provide a claim that will guarantee precedence over all other creditors. The lender also maintains the title or deed for the real estate and has the ability to repossess or foreclose in the event that the borrower is not able to pay, meaning the property will default to the mortgage holder.
The borrower, legally known as the mortgagor, is required to meet the conditions of the loan in order to prevent a foreclosure of the mortgage by the mortgagee. Providing all the requirements are met and the loan is paid back to the lender in full, the borrower becomes a home-owner. Real estate is almost always purchased with borrowed funds because of the large financial impact these kinds of major purchases can have. While a property is mortgaged it is almost always required to have the appropriate insurance to help protect the mortgage.
