In legal terms, a mortgage is the transfer of an interest in real estate, as security for the repayment of a loan. In plain language, a mortgage is a loan that is extended by a creditor to a borrower that wishes to purchase a piece of real estate, which is secured by a real estate lien being placed on the property by the party that extended the loan, which is typically a bank or other financial institution.
If the borrower, now a homeowner, defaults on their loan, the lender then has the legal right to foreclose on the property and have it sold to reduce the debt that is owed to the creditor. The borrower, also known as the mortgagor, obtains a mortgage loan through an application. In order to obtain a mortgage, the borrower will first apply to the lender, also known as the mortgagee.
The lender will then conduct a risk evaluation to determine whether or not a mortgage loan will be granted to the borrower. If the borrower is approved for the loan, the lender will issue a loan commitment that details the total loan amount, repayment terms for the loan, and the interest rate on the loan. When the borrower accepts the terms of the loan and signs the loan agreement, a contract is then formed between the two parties.
There are several different types of mortgages which may be executed between a borrower and creditor, including:
- Jumbo Mortgages: These are loans that exceed the loan limits set by corporations who buy mortgages from lenders, which come with a higher interest rate;
- Two-Step Mortgages: A two-step mortgage loan is a combination of fixed rate and adjustable rate mortgages. Two-step mortgage loans usually begin with a fixed interest rate, followed by an adjustment, which then leads to a new fixed-rate for the remaining term of the loan. These loans are considered to be especially ideal for borrowers with bad credit;
- Assumable Mortgages: These loans are given to a buyer or assumed by a buyer. Assumable mortgages reduce monthly payments and allow borrowers to save on closing costs. The disadvantage of these loans is that sellers generally sell their houses for more to make up for using this type of mortgage;
- Sub-Prime Mortgages: These mortgages are ideal for buyers with bad credit, as they provide people with money. However, the loan is accompanied by a higher interest rate, as well as more burdensome terms;
- Bi-Weekly Mortgages: These mortgages provide buyers with an option to cut down on the length of their loan terms by putting payments closer together, usually every two weeks instead of the typical schedule of once a month. These mortgages may not be a suitable option for borrowers who struggle to make monthly payments;
- Balloon Mortgages: These mortgages are less common than other types of mortgages, and involve a substantial payment being required at the end of the term of the loan in order to cover the unamortized loan principal;
- Fixed Rate Mortgages: With a fixed rate mortgage the interest rate and the amount that a borrower pays each month remains the same over the entire mortgage term, which is traditionally 15 or 30 years.
- Lenders often offer variations on fixed rate mortgages, including five- and seven-year fixed rate loans with balloon payments at the end of the mortgage term;
- Adjustable Rate Mortgages: An adjustable rate mortgage has an interest rate that fluctuates according to the interest rate in the economy.; or
- Interest-Only Mortgages: Interest-only mortgages allow the borrower to pay only the interest amount each month without paying any of the principal for several years of the loan.
- Although interest-only mortgages appear to allow anyone to afford a home as it can reduce the initial payments owed on the mortgage, the borrower must eventually pay off the interest payments in addition to the principal, which remains unchanged.
As can be seen, there are numerous different mortgages that are available to borrowers. Further, there are many cases in which a borrower may not be able to pay their mortgage as outlined in their mortgage agreement. In those situations the borrower may wish to walk away from a mortgage and buy another house.
Walking away from a mortgage is the term used when a homeowner simply abandons making payments on their mortgage. Although walking away from a mortgage is not in and of itself an illegal act, doing so comes with serious consequences. However, many borrowers still end up walking away from their mortgage due to their inability to keep up with the terms of their mortgage agreement.
It is important to note that there are scenarios in which it is actually acceptable for a borrower to walk away from a mortgage, such as when they discover that the mortgage they entered into was initiated through a scam or through mortgage fraud. However, it is still advised for an individual to obtain legal representation prior to abandoning a mortgage in order to avoid the negative consequences associated with failing to fulfill their legal agreement.
In fact there are many different options if you can’t pay your mortgage. For example, a borrower may engage in the following if they can’t repay their mortgage, such as negotiating with one’s lenders in order to modify the terms of the loan or the repayment structure of the loan. The borrower may also utilize forbearance which can stall the foreclosure process on their property and give them more time to pay their loan.
