What is a mortgage?
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A “mortgage” or “mortgage loan” is a just fancy term meaning “home loan.” One might say they took out a mortgage when they bought a first home. Or a first-time home buyer might say, “I got approved for a mortgage.” The term “mortgage” also implies that the lender who made the loan got in return certain rights to the property being borrowed against if the home loan is not repaid.
Interestingly the term “mortgage” derives from a 14th century Old French term which meant “dead pledge.” In other words, the loan plus any interest was required to be fully repaid until the borrower killed the debt by fully repaying it. If the loan was not fully repaid, the lender had the right to take back the asset that was pledged.
To make matters a bit more confusing for many first-time home buyers, they may never actually sign something called a “mortgage” or “mortgage agreement.” In many states mortgage lenders do not use “mortgage” documents, but rather a “Deed of Trust” and a “Note” in order to make mortgage loans to home buyers.
The Deed of Trust and the Note, though, essentially honor the original meaning of “mortgage” by requiring the borrower to repay the loan, according to the terms explained in these two documents. Failure on the part of the borrower to repay the home loan as agreed to in the Deed of Trust and Note, allows the mortgage lender the right to the property via the foreclosure process. In the case of a foreclosure, the lender or a subsequent mortgage investor who may have purchased the loan, has the right to take ownership of the property as their compensation for not being fully repaid.
The Deed of Trust and the Note are two of the most important documents a first-time home buyer signs during the home buying process. These documents spell out the important details of loan agreement between the borrower and the lender. They include important details such as the type of loan being made, the interest rate for the loan, the repayment period or term of the loan, the maturity date, late payment penalties, and all the other rights and responsibilities of both the borrower and the lender.
These agreements also clearly spell out the details about the specific property being pledged to the lender as the lender’s security for making the loan. Once the Deed of Trust is signed by the lender and the borrower, it is recorded with the local County Recorder as a lien on the property until the loan is paid back. Once the loan is fully repaid the lien can be cleared from the title to the property and the lender has no more rights to the property.
Don’t worry if you are still a bit confused by the meaning of “mortgage.” To help better understand this and other real estate terms, as well as, the entire home buying process, plan on taking a HUD-Approved homebuyer education course to learn more.