A mortgage is a type of loan that is secured with real estate or personal property.
Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money. A loan is a type of debt. All material things can be lent but this article focuses exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan. Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Bank loans and credit are one way to increase the money supply.
A mortgage is a method of using property (real estate or personal property) as security for the payment of a debt. The term mortgage refers to the legal device used for this purpose, but it is also commonly used to refer to the debt secured by the mortgage, the mortgage loan. In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value immediately. In many countries it is normal for home purchases to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Spain, the United Kingdom and the United States.
edit Banking Definition of loan vs mortgage
Money advanced to a borrower, to be repaid at a later date, usually with interest. Legally, a loan is a contract between a buyer (the borrower) and a seller (the lender), enforceable under the Uniform Commercial Code in most countries. The terms and conditions for repayment of a loan, including the finance charge or interest rate, are specified in a loan agreement. A loan may be payable on demand (a Demand Loan), in equal monthly installments (an Installment Loan), or they may be good until further notice or due at maturity (a Time Loan). There are various methods lenders use to categorize loans, both for internal control and for reporting lending activity to governmental agencies.
Debt instrument giving conditional ownership of an asset, secured by the asset being financed. The borrower gives the lender a mortgage in exchange for the right to use the property while the mortgage is in effect, and agrees to make regular payments of principal and interest. The mortgage lien is the lender's security interest and is recorded in title documents in public land records. The lien is removed when the debt is paid in full. A mortgage normally involves real estate and is a long-term debt, normally 25 to 30 years, but can be written for much shorter periods.
edit Legal Definition of loan and mortgage
"Delivery of a sum of money to another under a contract to return at some future time an equivalent amount with or without an additional sum agreed upon for its use; and if such be the intent of the parties the transaction will be deemed a loan regardless of its form". The characterization of a transaction as a loan or some other type of borrowing has significance in ascertaining whether usury laws apply to the amount of interest being charged.
A legal document by which the owner (buyer) transfers to the lender an interest in real estate to secure the repayment of a debt, evidenced by a mortgage note. When the debt is repaid, the mortgage is discharged, and a satisfaction of mortgage is recorded with the register or recorder of deeds in the county where the mortgage was recorded. Because most people cannot afford to buy real estate with cash, nearly every real estate transaction involves a mortgage. The mortgage must be executed according to the formalities required by the laws of the state where the property is located.
edit Types of loans vs mortgages
edit Types of Loans
edit Secured Loans
A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter - often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
edit Unsecured Loans
These may be available from financial institutions under many different guises or marketing packages:
- credit card debt
- personal loans
- bank overdrafts
- credit facilities or lines of credit
- corporate bonds
The interest rates applicable to these different forms may vary depending on the lender, the borrower. These may or may not be regulated by law.
edit Types of Mortgage
There are essentially three types of legal mortgage.
edit Mortgage by demise
In a mortgage by demise, the creditor becomes the owner of the mortgaged property until the loan is repaid in full (known as "redemption"). This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption. This is an older form of legal mortgage and is less common than a mortgage by legal charge.
edit Mortgage by legal charge
In a mortgage by legal charge, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it. To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage. This is common in the United States, since 1925, it has been the usual form of mortgage in England and Wales. In Scotland, the mortgage by legal charge is also known as standard security.
edit Equitable Mortgage
In an Equitable Mortgage the lender is secured by taking posession of all the original title documents of the property and by borrower's signing a Memorandum of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained from the bank.
edit Loan vs Mortgage Agreements
A loan agreement is a contract entered into between which regulates the terms of a loan. Loan agreements usually relate to loans of cash, but market specific contracts are also used to regulate securities lending. Loan agreements are usually in written form, but there is no legal reason why a loan agreement cannot be a purely oral contract (although in some countries this may be limited by the Statute of frauds or equivalent legislation).
edit Types of Loan Agreements
Loan agreements are usually characterized either
- by the type of lender
- bilateral loans
- syndicated loans
- by the type of facility
- term loans, which are repaid in set installments over the term
- Revolving loans (or overdrafts) where up to a maximum amount can be withdrawn at any time, and interest is paid from month to month on the drawn amount
Within these two categories though, there are various subdivisions such as interest-only loans, and balloon payment loans. It is also possible to subcategories on whether the loan is a secured loan or an unsecured loan, and whether the rate of interest is fixed or floating.