Tuesday, December 15, 2009

What is a mortgage?

In simple terms, a mortgage is putting up real property (real estate) to secure a loan. This means that if you fail to meet the terms of the mortgage—for example, by failing to make your agreed-upon monthly payments—the lender can sell your house through a process called foreclosure to get back the money you borrowed to buy it.

You should familiarize yourself with certain technical terms used in the mortgage industry.

A mortgage is a two-party document—the mortgagor (borrower) gives the mortgage, and the mortgagee (lender) lends the money. Most people incorrectly say that they are going to “buy a mortgage.” The expression has become so common that everyone knows that someone who says it is trying to borrow—not lend—money.

Another term that you should know—which is often used incorrectly— is pledge. To pledge something is to deliver physical possession of it, like if you are getting a loan from a pawnshop. When you do not give up possession, you hypothecate the property—you do not pledge it. Since pledge is a simpler word than hypothecate, it is commonly used—even though not technically correct.

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