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What is ' Mortgage Loan'

A mortgage loan, also referred to as a mortgage, is used by purchasers of real property to raise funds to buy real estate; by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property. This means that a legal mechanism is put in place which allows the lender to take possession and sell the secured property ("foreclosure" or "repossession") to pay off the loan in the event that the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a "Law French" term used by English lawyers in the Middle Ages meaning "death pledge", and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure.[1] Mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)."

There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.

  • Interest:
    Interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
  • Term:
    Mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
  • Payment amount and frequency:
    The amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
  • Prepayment:
    Some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
  • In a fixed rate mortgage, the interest rate, remains fixed for the life (or term) of the loan.[5] In case of an annuity repayment scheme, the periodic payment remains the same amount throughout the loan. In case of linear payback, the periodic payment will gradually decrease.
  • In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be, for example, 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.