Real Estate Mortgage

Definition:

Mortgages are written instruments that pledge real estate as security for a debt. Without a debt, there can be no mortgage. In executing a long term mortgage, the borrower typically pledges real estate and relies on personal credit as security for the debt.

Elements of a mortgage:

            An enforceable mortgage has the following elements:

Ø      A mortgage must be in written form

Ø      The parties to the mortgage must be legally competent (having the necessary ability/authority/skill)

Ø      A clause of the mortgage must pledge real estate as security for the debt

Ø      The debt must be identified, with specified terms of repayment

Ø      The mortgage must include a valid legal description of the property it covers

Ø      The borrower must have a mortgageable interest

Ø      The foreclosure conditions should be stated

Ø      The mortgage must be properly witnessed or acknowledge according to state law

Ø      The mortgage must be delivered and accepted

Types of mortgage:

Ø      Priority of liens: Up to this point it has been implicitly assumed that buyer made a down payment and then paid the seller by borrowing the balance under a long term mortgage

Ø      Methods of repayment: Lenders and borrowers may select from a wide range of amortization plans. In some cases, the mortgage repayment plan may be adopted to differed payment or to partially amortized plans and their combinations

Ø      Alternative mortgage instruments: The expression alternative mortgage instruments covers unique mortgages that represent ways in which borrowers and lenders adapt to new legal and economic conditions. Lenders now have considerable flexi in offering new types of mortgage.

Ø      The type of property mortgage: Mortgages are adapted to the type of real estate security pledged. The most popular forms of mortgages deserve added comment. Example: package mortgage financing

Ø      Mortgage covenants: Mortgage covenants are promises of the borrower and lender included as part of the mortgage. A typically covenants contain the following types:

1.      The borrower shall pay principal and interest promptly when due

2.      The borrower shall pay all taxes, assessments and other charges

3.      The borrower shall keep the improvements which is damage by hazards

4.      The borrower shall keep the property in good repair

5.      The lender may make reasonable inspections of the property

6.      Upon payment of all sums secured by the mortgage, the lender shall release the mortgage without charge to the borrower. Usually the lender holds the mortgage until the final payment.

Types of mortgage:

Ø      The priority of liens:

Þ     Up to this point, it has been implicitly assumed that a buyer made a down payment and then paid the seller by borrowing the balance under a long-term mortgage.

Þ     To illustrate, assume that the seller conveys title for $75000. The borrower pays the seller S20,000 at the time of closing, providing for the balance of $55,00 from a lender in return for a 25-year mortgage repayable monthly at 13 percent interest per annum arid a promissory note for $55,00.

Þ     The lender owns a first mortgage which has priority over other mortgages and loans executed by the borrower at later dates.

1.      Second mortgage financing

Þ     Suppose, however that tile buyer effects to pay the seller $10000 down securing the additional $10000 under a 10-year mortgage at 15 percent interest.

Þ     The second lender holds a lien junior to the first mortgage.

Þ     The second mortgage would usually include a statement that the mortgage is subordinate to the prior mortgage which is described according to the amount of indebtedness, the date of recording, the names of the parties, a legal description of the property, and other details

Þ     Such an arrangement is often called second mortgage financing or junior lien financing.

Þ     The borrower is advised to include a waiver in the second mortgage stating that the borrower has the right to refinance the first mortgage provided that the refinanced mortgage does not exceed the remaining balance of the first mortgage.

Þ     Second mortgage financing is used by borrowers with relatively high incomes but with few assets.

2.      Purchase money mortgage

Þ     A mortgage given to a seller as part of the purchase price is a purchase money mortgage.

Þ     The seller accepts a purchase money mortgage as a substitute for cash.

Þ     In the preceding example, the seller might be willing to accept 1) $10000 cash from the buyer, 2) $55000 cash which the buyer obtains from a first mortgage and 3) a $10,000 purchase money mortgage.

Þ     In this case, the purchase money mortgage constitutes a second mortgage and in some states does not require a promissory note.

Þ     Alternatively, the seller could accept a purchase money mortgage for $65,000 and $10000 cash from the buyer.

Þ     In this case, the purchase money mortgage would be a first lien.

Þ      Since the borrower is not personally liable. the seller is secured only by the value of the real estate

Ø      Methods of repayment:

1.      Term mortgage

2.      Level payment amortization

3.      Variable payment amortization

4.      Partially amortized mortgage

 

Ø      Alternative mortgage instrument:

1.      Variable rate mortgage (VRM)

2.      Graduated payment adjustable mortgage loan (GPAML)

3.      Graduated equity mortgage (GEM)

4.      Equity participation mortgage (EPM)

5.      Shared appreciation mortgage (SAM)

6.       Reverse annuity mortgage (RAM)

7.      Renegotiable rate mortgage (RRM)

8.      Price level adjusted mortgage (PLAM)

9.      Flexible loan insurance program (FLIP)

Ø      The type of property mortgage:

1.      Package mortgage financing

2.      Blanket mortgage

3.      Participation mortgage

4.      Construction mortgage

5.      Wraparound mortgage