Overview
A mortgage loan is a loan secured by real property through the use of a
mortgage (a legal instrument). However, the word mortgage alone, in everyday
usage, is most often used to mean mortgage loan.
According to Anglo-American property law, a mortgage occurs when an owner
(usually of a fee simple interest in realty) pledges his interest as
security or collateral for a loan. Therefore, a mortgage is an encumbrance
on property just as an easement would be, but because most mortgages occur
as a condition for new loan money, the word mortgage has become the generic
term for a loan secured by such real property.
As with other types of loans, mortgages have an interest rate and are
scheduled to amortize over a set period of time; typically 30 years. All
types of real property can, and usually are, secured with a mortgage and
bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance
private ownership of residential property. For commercial mortgages see the
separate article. Although the terminology and precise forms will differ
from country to country, the basic components tend to be similar:
* Property: the physical residence being financed. The exact form of
ownership will vary from country to country, and may restrict the types of
lending that are possible.
* Mortgage: the security created on the property by the lender, which will
usually include certain restrictions on the use or disposal of the property
(such as paying any outstanding debt before selling the property).
* Borrower: the person borrowing who either has or is creating an ownership
interest in the property.
* Lender: any lender, but usually a bank or other financial institution.
* Principal: the original size of the loan, which may or may not include
certain other costs; as any principal is repaid, the principal will go down
in size.
* Interest: a financial charge for use of the lender's money.
* Foreclosure or repossession: the possibility that the lender has to
foreclose, repossess or seize the property under certain circumstances is
essential to a mortgage loan; without this aspect, the loan is arguably no
different from any other type of loan.
Many other specific characteristics are common to many markets, but the
above are the essential features. Governments usually regulate many aspects
of mortgage lending, either directly (through legal requirements, for
example) or indirectly (through regulation of the participants or the
financial markets, such as the banking industry), and often through state
intervention (direct lending by the government, by state-owned banks, or
sponsorship of various entities). Other aspects that define a specific
mortgage market may be regional, historical, or driven by specific
characteristics of the legal or financial system.