Definition: A mortgage is loan where the lender is protected from default by the borrower’s collateral identified in the mortgage agreement. In other words, it’s a loan where the lender has the right to force a sale of the collateral and collect the proceeds if the borrower is unable to meet the loan payments.
What Does Mortgage Mean?
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We are all familiar with the concept of a mortgage from personal experience. Most people don’t have enough money to purchase a home outright, so they go to a bank and take out a loan. The bank agrees to give them a loan with the condition that the home can be legally repossessed and sold to pay off the balance of the loan in case the borrower defaults on his or her payments. This is the common arrangement that we are all familiar with. Traditional mortgages are structured over a 15 or 30-year span of time and usually require a monthly payment. Most banks are required to collect property taxes and homeowner’s insurance on behalf of their borrowers and remit these amounts to the local governments.
Thus, the typical monthly payment for most individuals includes a principle, interest, insurance, and tax payment. The insurance and tax payments are placed in an escrow account until the lender remits them to the proper agency.
Example
Individuals aren’t the only entities that can have a mortgage. Businesses often take out loans to purchase buildings as well as improvements. Retailers that rent store locations in a mall might take out a loan to improve parts of the store. Since the retailer doesn’t own the building, it can’t use the property as collateral. Instead receivables or other assets are usually used to satisfy the collateral requirement of the loan. Although improvement type loans are not typically referred to as mortgages, they follow the same principles.
