Mortgage
A loan secured by real property, with foreclosure upon default.
A mortgage loan, also known in civil law jurisdictions as a hypothec loan, is a loan used by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property. The loan is secured on the borrower's property through mortgage origination, allowing the lender to take possession and sell the property (foreclosure or repossession) if the borrower defaults. The word mortgage derives from a Law French term meaning 'death pledge,' referring to the pledge ending when the obligation is fulfilled or the property is taken through foreclosure.
- Field
- Finance, Real Estate, Law
- Known for
- Secured loan using real property as collateral
- Key feature
- Foreclosure or repossession upon default
- Origin of term
- Law French 'death pledge'
- Typical term
- Up to 30 years in the United States
- Common lenders
- Banks, credit unions, building societies
Lore & Background
Mortgage loans are structured as long-term loans with periodic payments similar to an annuity, calculated according to time value of money formulae. The most basic arrangement requires a fixed monthly payment over ten to thirty years, with the principal slowly paid down through amortization. Lenders provide funds against property to earn interest income, generally borrowing these funds themselves through deposits or bonds. The price at which lenders borrow money affects the cost of borrowing. Lenders may also sell the mortgage loan to other parties, often in the form of a security through securitization.
Reader's Guide
Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property. Few individuals have enough savings to purchase property outright, so strong domestic mortgage markets have developed where demand for home ownership is highest. Mortgages can be funded through the banking sector via short-term deposits or through capital markets via securitization, which converts pools of mortgages into fungible bonds sold to investors in small denominations. Governments regulate many aspects of mortgage lending directly through legal requirements or indirectly through regulation of participants and financial markets, and often through state intervention such as direct lending or sponsorship of entities. The lender's rights over the secured property take priority over the borrower's other creditors, meaning that if the borrower becomes bankrupt, other creditors are repaid from a sale of the secured property only if the mortgage lender is repaid in full first.
Did You Know?
- The word 'mortgage' is derived from a Law French term used in Britain in the Middle Ages meaning 'death pledge'.
- Mortgage loans can be funded through the banking sector or through capital markets via securitization.
- In many jurisdictions, it is normal for home purchases to be funded by a mortgage loan.
- The lender's rights over the secured property take priority over the borrower's other creditors.
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