A mortgage loan is a type of loan where property/real estate is the collateral. It is pledged to borrow money. You/borrower have to enter into an agreement with the bank. You get cash upfront and then make payments over a period of time through EMIs. The bank/lender has possession of the original property documents till you repay the loan.
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In a simple mortgage, the mortgagee (This could be a bank/lender), does not enjoy possession of the property. The mortgagor (one who pledges the property), makes a legally binding agreement to repay the mortgage. The mortgagor gives the mortgagee the right to sell the property, to recover the dues.
In this agreement, the mortgagor agrees to repay the mortgage money within a certain date, and then transfer the property to the mortgagee (bank/lender). The mortgagee agrees to retransfer the property back to the mortgagor once the dues (mortgage money), is repaid as per terms and conditions.
The mortgagor (borrower) gives possession of the property to the bank (mortgagee), until mortgage money is repaid. The mortgagee also receives rent/other benefits from the land. The mortgagee/bank agrees to appropriate the property in lieu of interest/payment of mortgage money.
The mortgagee (bank) provides documents of title of immovable property to the mortgagor with intent to create a security of the same.
The mortgagor sells the property to the mortgagee with a condition that the sale will be absolute/permanent on a default. If the mortgage dues are paid, the sale is null and void and the mortgagee will transfer the property back to mortgagor.
The money you borrow on the mortgage is the principal. You have to pay back the principal amount on the mortgage each month. In addition you have to pay back interest on the loan.
Repayments depend on type of interest rate which may be fixed or floating rate. Fixed rates mean payments remain constant across loan tenure. Floating rates change with market rates.
Amortization means spreading out the loan into a series of fixed payments over time. You pay off the loan principal and interest in different proportions each month.
When you repay a mortgage loan, the repayments are divided into two parts:
At the beginning of the mortgage, most of the money you pay goes in interest repayments. Only a small portion goes towards principal repayments. As time passes (more repayments are made), each payment goes towards principal as most interest payments are already made. In amortization, the entire loan is paid off within the tenure. The last mortgage payment closes off the loan.
The word mortgage is a French word which means “dead pledge”. This pledge ends when the mortgage is repaid. Mortgage is an encumbrance where the owner pledges his interest in a property as security/collateral for a loan.
Mortgages have interest rate which is scheduled to amortize (paid back) over a tenure extending around 30 years. Residential, commercial or industrialized property can be mortgaged.
Interest rate varies depending on type of property. It’s around 12-15% a year.
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