How Mortgages Work
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A mortgage is created when someone uses real estate to secure a
promise to repay a debt. For example, if you borrow money from a
bank and give the bank permission to sell your house to pay off
the debt if you don’t pay it back yourself, then you have
created a mortgage on your house. Since most people can’t
afford to pay cash for a house, most people create what is
known as a purchase money mortgage on their house (at least
their first house anyway). This means that the bank uses the
house as security for your promise to repay the money they
loaned you to buy the house in the first place. The mortgage is
the document used to create this security interest. The one who
borrowed the money is called the mortgager, and the one who
loaned the money (the bank in this case) is called the
mortgagee. The main advantage of a mortgage for the mortgagee
is that if you don’t pay back the loan, they don’t have to
worry whether they can find you or not or if you have enough
money to pay the debt. The main advantage for the mortgager is
that he can get a loan that way that he might not be able to
get otherwise =96 he can borrow $100,000 on an annual salary of
$50,000 and total savings of $10,000, even though without his
new house as security there’s no way the bank would have loaned
him that much money.
If you mortgage your house and then default on the underlying
loan (fail to pay it back according to the terms of the loan
agreement), what will the bank do? Well, it’s unlikely that the
president of the bank is going to move in. Instead, the bank
will sell the house (most likely through a judicial sale) and
take the money that you own them out of the proceeds. If the
proceeds are not less than what you owe them (which is unlikely
if they have competent loan officers), then you will still owe
them the difference (and the debt will be unsecured, since you
don’t own the house anymore). If, on the other hand, there is
money left over after the mortgage is paid and the expenses of
the sale are covered, you get to keep it, assuming that there
are no other mortgages on the house Actually it does get a bit
more complex than this, but I’m sure you get the basic idea.
DISCLAIMER: The following is intended for reference purposes
only and does not constitute legal advice.
About The Author: “Real Estate Law in Plain English” is located
at http://realpropertylaw.blogspot.com. See also
http://realpropertylaw.blogspot.com/2007/05/how-title-insurance-companies-s
ettle.html.
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