A mortgage is a security for the loan that the lender makes to the person who borrows money from him. It is not a debt; rather it is the lender’s security for debt.
For example, the transfer of a land or equivalent from the owner of the land to the mortgage lender on the clause that this interest will be returned to the owner when the terms of the mortgage have been met.
This word is derived from the French “dead pledge” which means that the pledge ends when the obligation is fulfilled.
A mortgage is the standard method by which person’s or businesses can buy real estate without the need to pay full value immediately.
In this process of mortgage two people are most important. One is the mortgage lender and the other borrower.
A mortgage lender is an investor who lends money taking the security from the person who wants to borrow the money. When a lender sells the mortgage they earn revenue which is called as Service Release Premium. The mortgage lender is known by the term mortgagee. As a mortgagee, the lender has the right to sell the property if the borrower fails to pay the amount in the given time. Since a mortgage runs with land, the mortgagee has the right to sell the property even if the borrower transfers the property to someone else and fails to pay the amount.
The person who borrows the amount is said to be the mortgagor. He is the person who owes the obligation secured by the mortgage. He must satisfy the conditions underlying the loan else he risks his mortgage by the mortgagee to recover his debt.
There are two types of mortgage instruments in United States. They are
Mortgage: this gives the lender a lien to the mortgaged property. But foreclosure of that lien needs judicial proceedings by declaring that the mortgaged property can be sold on the terms that the debt is not paid in the given time.
The deed of trust: this is a deed by the borrower to the trustee for the purpose of obtaining a debt. It differs from mortgage in that it can be foreclosed by a non-judicial sale held by the trustee. This is faster than for a mortgage, on the order of 3 months rather than 1 year.
Security deed: this is an actual conveyance of real property for securing a debt. Here the grantee or the lender enjoys the property and after the debt is cleared the borrower takes it back.
A mortgage in which monthly principal and interest payments remain constant throughout the life of the loan is called as simple or fixed rate mortgage. The number of years may vary i.e. it can be 30 years or 20 years or 10 years. If the loan is for 30 years then it is called as 30 years FRM(fixed rate mortgage), if the loan is for 20 years then it is called as 20 years FRM and so on.
Let us suppose a person takes a loan of $120,000 for 15 years at an annual interest rate of 8.125% then the loan to be paid monthly is calculated as below:
Monthly payment = principal * interest * (1+ interest) power number of months / (1 + interest) power number of months -1
i.e. monthly payment = 120,000 * 8.125%/12 * (1+8.125%/12) to the power of 180 / (1+ 8.125%/12) to the power of 180 -1
Since the interest given is annual it has to be divided by 12 to get the monthly interest rate for the calculation.
So the monthly payment amounts to $1155.46
In this process of payment the debt is gradually reduced through installment payments of principal and interest. Each time loan is paid in the form of some interest along with a part of the principal.
The formula is
Monthly payment A = P r (1+r) power of n/ (1+r) power of n -1
Here P = $20,000
r = 7.5%/12 months = .625% per month
n= 5 years = 60 months
Therefore A = $400.76
A mortgage program in which interest and payments are varied frequently is called as adjustable rate mortgage.
Let us take the this example
Mortgage amount = $100,000
Term = 30 years
Starting interest rate = 5%
Starting monthly payment = $536.82
Total payment = $234,310.11
Total interest = $134,310.11
Months before adjustment = 60
Months between adjustment =12
Expected adjustment = .25%
Interest rate cap = 12%
Payment after first adjustment = $550.28
Maximum payment = $748.84
In the above example, the monthly payment is calculated for the payment of entire mortgage balance at the end of the term. After a fixed rate period has passed the interest rate and payment varies on the frequency given