Definition of mortgage

What is the mortgage?

Mortgage occurs when an asset is given as collateral to secure a loan. The owner of the asset does not relinquish title, possession, or property rights, such as income generated by the asset. However, the lender can seize the asset if the terms of the agreement are not respected.

A rental property, for example, may be the subject of a mortgage as security for a mortgage issued by a bank. While the property remains secured, the bank has no claim on the rental income that comes in; however, if the owner defaults on the loan, the bank can foreclose the property.

Key points to remember

  • Mortgage occurs when an asset is given as collateral to secure a loan. The owner of the asset does not relinquish title, possession, or property rights, such as income generated by the asset.
  • Mortgage most often occurs in mortgages, where the house serves as collateral but the bank has no claim on the cash flow or income generated unless the borrower defaults.
  • Margin lending in brokerage accounts is another common form of mortgage found in securities trading and investing.

Understanding the mortgage

Mortgage most often occurs in mortgage loans. The borrower technically owns the house, but because the house is pledged as collateral, the mortgage lender has the right to foreclose on the house if the borrower cannot meet the repayment terms of the contract. loan agreement– which happened during the seizure crisis. Auto loans are also secured by the underlying vehicle. Unsecured loans, on the other hand, do not work with the mortgage since there is no collateral to claim in the event of default.

As the mortgage provides security to the lender due to the collateral given by the borrower, it is easier to secure a loan and the lender may offer a lower interest rate than an unsecured loan.

Special considerations: mortgage in the investment

Another common form of mortgage is the margin loan in brokerage accounts. When an investor chooses to buy on margin or to sell short, he agrees that these securities can be sold if necessary in the event of a margin call. The investor owns the securities in his account, but the broker can sell them if he issues a margin call that the investor cannot meet, to cover investors’ losses.

When banks and brokers use mortgaged collateral as collateral to support their own transactions and transactions with the agreement of their customers, in order to obtain a lower cost of borrowing or a discount on fees. It’s called remortgage.

Re-mortgaging by banks and financial institutions is less common today due to the negative impact this practice had during the 2007-2008 financial crisis.

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