A mortgage loan or mortgage is used either by purchasers of real property to raise funds to buy real estate, or alternatively by existing property owners to raise funds for any purpose, while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination; this means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can be described as "a borrower giving consideration in the form of a collateral for a benefit". Mortgage borrowers can be individuals mortgaging their home or they can be businesses mortgaging commercial property.
The lender will be a financial institution, such as a bank, credit union or building society, depending on the country concerned, the loan arrangements can be made either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, other characteristics can vary considerably; the lender's rights over the secured property take priority over the borrower's other creditors, which means that if the borrower becomes bankrupt or insolvent, the other creditors will only be repaid the debts owed to them from a sale of the secured property if the mortgage lender is repaid in full first. In many jurisdictions, it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets for mortgages have developed. Mortgages can either be funded through the banking sector or through the capital markets through a process called "securitization", which converts pools of mortgages into fungible bonds that can be sold to investors in small denominations.
According to Anglo-American property law, a mortgage occurs when an owner pledges his or her interest as security or collateral for a loan. Therefore, a mortgage is an encumbrance on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property; as with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time 30 years. All types of real property can be, are, secured with a mortgage and bear an interest rate, supposed to reflect the lender's risk. Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property. Although the terminology and precise forms will differ from country to country, the basic components tend to be similar: Property: the physical residence being financed; the exact form of ownership will vary from country to country, may restrict the types of lending that are possible.
Mortgage: the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property. Borrower: the person borrowing who either has or is creating an ownership interest in the property. Lender: any lender, but a bank or other financial institution. Principal: the original size of the loan, which may or may not include certain other costs. Interest: a financial charge for use of the lender's money. Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan. Completion: legal completion of the mortgage deed, hence the start of the mortgage. Redemption: final repayment of the amount outstanding, which may be a "natural redemption" at the end of the scheduled term or a lump sum redemption when the borrower decides to sell the property.
A closed mortgage account is said to be "redeemed". Many other specific characteristics are common to many markets, but the above are the essential features. Governments regulate many aspects of mortgage lending, either directly or indirectly, through state intervention. Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system. Mortgage loans are gen
Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. It is distinct from a fee which the borrower may pay some third party, it is distinct from dividend, paid by a company to its shareholders from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs. For example, a customer would pay interest to borrow from a bank, so they pay the bank an amount, more than the amount they borrowed. In the case of savings, the customer is the lender, the bank plays the role of the borrower. Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, investment or enterprise; the rate of interest is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent.
Compound interest means. Due to compounding, the total amount of debt grows exponentially, its mathematical study led to the discovery of the number e. In practice, interest is most calculated on a daily, monthly, or yearly basis, its impact is influenced by its compounding rate. According to historian Paul Johnson, the lending of "food money" was commonplace in Middle Eastern civilizations as early as 5000 BC; the argument that acquired seeds and animals could reproduce themselves was used to justify interest, but ancient Jewish religious prohibitions against usury represented a "different view". The first written evidence of compound interest dates 2400 BC; the annual interest rate was 20%. Compound interest was important for urbanization. While the traditional Middle Eastern views on interest was the result of the urbanized, economically developed character of the societies that produced them, the new Jewish prohibition on interest showed a pastoral, tribal influence. In the early 2nd millennium BC, since silver used in exchange for livestock or grain could not multiply of its own, the Laws of Eshnunna instituted a legal interest rate on deposits of dowry.
Early Muslims called this riba, translated today as the charging of interest. The First Council of Nicaea, in 325, forbade clergy from engaging in usury, defined as lending on interest above 1 percent per month. Ninth century ecumenical councils applied this regulation to the laity. Catholic Church opposition to interest hardened in the era of scholastics, when defending it was considered a heresy. St. Thomas Aquinas, the leading theologian of the Catholic Church, argued that the charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. In the medieval economy, loans were a consequence of necessity and, under those conditions, it was considered morally reproachable to charge interest, it was considered morally dubious, since no goods were produced through the lending of money, thus it should not be compensated, unlike other activities with direct physical output such as blacksmithing or farming. For the same reason, interest has been looked down upon in Islamic civilization, with all scholars agreeing that the Qur'an explicitly forbids charging interest.
Medieval jurists developed several financial instruments to encourage responsible lending and circumvent prohibitions on usury, such as the Contractum trinius. In the Renaissance era, greater mobility of people facilitated an increase in commerce and the appearance of appropriate conditions for entrepreneurs to start new, lucrative businesses. Given that borrowed money was no longer for consumption but for production as well, interest was no longer viewed in the same manner; the first attempt to control interest rates through manipulation of the money supply was made by the Banque de France in 1847. The latter half of the 20th century saw the rise of interest-free Islamic banking and finance, a movement that applies Islamic law to financial institutions and the economy; some countries, including Iran and Pakistan, have taken steps to eradicate interest from their financial systems. Rather than charging interest, the interest-free lender shares the risk by investing as a partner in profit loss sharing scheme, because predetermined loan repayment as interest is prohibited, as well as making money out of money is unacceptable.
All financial transactions must be asset-backed and it does not charge any interest or fee for the service of lending. In economics, the rate of interest is the price of credit, it plays the role of the cost of capital. In a free market economy, interest rates are subject to the law of supply and demand of the money supply, one explanation of the tendency of interest rates to be greater than zero is the scarcity of loanable funds. Over centuries, various schools of thought have developed explanations of interest and interest rates; the School of Salamanca justified paying interest in terms of the benefit to the borrower, interest received by the lender in terms of a premium for the risk of default. In the sixteenth century, Martín de Azpilcueta applied a time preference argument: it is p