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Wednesday, January 13, 2016

Why Mortgage?


Why mortgage?

What is mortgage?

A mortgage is a method of using property as security for the payment of a debt. The provisions relating to mortgage of property are contained under Sections 58 to 104 of the Transfer of Property Act 1882. Section 58 of the Act specifically defines the meaning of mortgage and other related terms, according to which, mortgage means the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced, by way of loan or an existing or future debt. The transferor is called a mortgagor, the transferee a mortgagee, the principal money and interest of which payment is secured is called 'mortgage money', and the instrument by which transfer is affected is called a mortgage deed.

Mortgage can be simple mortgage, mortgage by conditional sale, or mortgage by deposit of title deeds. The immovable property, the interest of which is transferred to the creditor, must be specific in description with boundaries and should be easily identifiable.

Why mortgage?

Whenever a loan is taken to purchase a house, banks/HFCs insist that adequate security should be provided. This security is generally obtained in the form of mortgage over immovable property of the borrower.  

Mortgage of property gives the lender a right to acquire and sell the property in case of default by the borrower in repayment of loan and other dues as per the agreed terms and conditions. It creates a legally binding contract between the parties. 

Loan and mortgage documents are generally signed simultaneously.  Besides loan documentation, the parties sign a mortgage deed that defines terms and conditions between the parties.

How a Mortgage Works

A mortgage is simply a loan against a property, agreed to by a lender on the application of a borrower. A rate of interest is charged on the balance outstanding and a monthly payment calculated that the customer needs to pay in order not to be in breach of the mortgage conditions.

If the borrower fails to make timely payments, the lender can repossess the property. Because houses tend to be expensive - as are the loans to pay for them - banks/HFC allow their repayment over extended periods of time, known as the "term"of loan. Terms can range anywhere between 10 to 30 years. Shorter terms generally have lower interest rates than long-term. However, long-term loans may offer the advantage of having lower monthly payments, as here you are taking more time to pay off the debt.

The bank/HFC that holds loan account is responsible primarily for "servicing" it. When you have a mortgage loan, your monthly payment will generally include the following components:

  • An amount for the principal amount of the balance
  • An amount for interest owed on that balance.

Mortgage interest rates come in different forms. With a "fixed rate mortgage loan," where the rate and monthly payment remains the same for the life of the loan. With an "floating rate mortgage loan," the interest rate changes based on a specified index. As a result, monthly payment amount will fluctuate. Mortgage process in simple works best if carried out in the manner explained in above lines.

Creditor Vs. Default Mortgage Borrower

When a mortgage borrower fails to fulfill payment terms and conditions without information, then creditor generally takes the case forward under the provisions of Foreclosure concept. Foreclosure is the legal proceeding in which a bank or other secured creditor sells or repossesses a parcel of immovable property due to the owner's failure to comply with signed agreement between the lender and borrower called a "mortgage." Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a mortgage of the property. When the process is complete, it is typically said that "the lender has foreclosed its mortgage."

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