A mortgage is a lien against real estate granted by an individual or business in exchange for a loan. The real estate is the collateral, or security, pledged to ensure repayment of the loan. The borrower is called the mortgagor. The lender, who has received a secured interest in the real estate, is called the mortgagee.
The mortgagor is considered the owner of the property, and may exercise those rights and profit from the property as long as he continues to make his mortgage payments. Unlike a tenant, he can paint the property, lease it out, change the landscaping, or make upgrades without getting permission from the lender. Any rent he receives is his, and the lender does not have a right to prohibit any lease that is for a lawful purpose.
In the United States, the mortgagor is also protected from undo interference from the mortgagee. The mortgagee does not have the right to enter the property without the consent of the owner as long as the property is not in foreclosure. In addition, a mortgage contract cannot include a clause that gives the mortgagee the right to purchase the property. The mortgagor cannot be required to purchase any other items or engage in any other business with the lender as a condition of the mortgage. For example, a bank cannot require a borrower to maintain accounts with their institution in exchange for the mortgage.
The primary responsibility the mortgagor has is to repay the loan according to the terms in the loan document. A mortgagor has the right to pay his loan early, on time, or late, as long as a foreclosure sale has not occurred. While some loans may include an early payment penalty if the loan is paid before a minimum amount of time, any contract that prevents early payment is void. A late fee is usually required if payment is not received within a set number of days past the due date.
Most mortgage contracts also require the mortgagor to maintain insurance on the property if it contains a building of some sort. The mortgagor is also expected to pay real estate taxes in a timely manner. Non-payment of taxes can result in a tax sale of the property, and in this situation the lender would lose the security for the loan. To make certain these obligations are paid in a timely fashion, most lenders require borrowers to include a portion of these amounts with each payment. The money is kept in a non-interest bearing account, called an escrow account, and then paid out on the due date by the lender.
If the mortgagor does not make his full payments, then the property goes into default. In the United States, a lender is required to send a notice of default to the borrower before taking possession of the property. This notice must state how far behind the mortgagor is on his payments, and the total amount payments and legal fees required to cure the default. The deadline for curing the default must also clearly be stated. Since foreclosures generally result in a loss to the lender, most institutions are willing to work with a borrower in bringing a loan current.
The majority people cannot afford to purchase real estate with cash. In this case, a mortgage is a viable option. There are many kinds and terms of loans, however, so it is good to shop around for the mortgage that best fits an individual’s financial situation.
