For understanding mortgages one need to know and understand few terminologies. These are-

Mortgage –

The term mortgage is derived from the French term meaning 'dead pledge'. This means that the mortgage agreement ends when the deal is over. In home loans it may refer to either completion of term of home loan i.e. when the loan is paid off completely, or when the property is taken into foreclosure.

Mortgage lender-

Lender is usually a bank or a financial institution that pays the loan in lieu of property.

Borrower –

Borrower is referred to one who borrows or take money from lender to purchase a home or building.

Mortgage broker –

Broker is an intermediate between the lender and borrower who search and survey for the lender and helps borrower to find a best mortgage deal. They also help negotiating with the lender on borrower’s behalf.

Principal amount –

It is the amount which is actually borrowed from the lender by the borrower. It is the total amount given by the bank to the customer who has mortgaged its property.

Amortization period / term –

This refers to the time duration in which the loan will be completely paid off. It is generally 20-30 years in case of mortgages related to property.

Down payment –

While mortgaging property and receiving loans the borrower need to give his contribution i.e. he need to pay some initial amount which is about 20-25 % of the loan received. Earlier these values were very less and about 3% of the loan payment. But with so many foreclosures, financial crises & the banks too after facing credit problems have raised this amount. But they have policies for one who are not able to pay this much down payment beforehand.

Rate of interest –

The bank or financial institution charges some additional amount along with the principal amount on the loan amount in return of lending loan to the borrower. This is known as rate of interest. It usually varies with each financial institution but is generally between 10-15% of the mortgaged amount.

Fixed rate of interest –

This type of rate of interest is fixed through out the term whatever the market conditions are. They are independent of market value fluctuations of the property.

Flexible rate of interest –

This type of rate of interest varies through out the amortization period of the loan. In it the rate of interest varies as the market value of property varies. This type of interest rate can be lower at one time and higher on other time.

Mortgage refinancing –

It may be defined as replacement of existing debt term and conditions with a debt obligation with different terms. It may be due to lower interest rates on current plans or it is providing some other benefits.

Foreclosure –

This term is used when the lender obtain ownership over the property if the borrower is unable to pay the loan installments.

Lock in period –

It is the period in which the borrower cannot repay the remaining amount and has to wait to repay the loan till the specific duration of time. It is usually 7 years for most of the cases.

Debt service coverage ratio (DSCR) –

It is calculated as net income from the property divided by mortgaged amount including the interest. It is usually calculated by the lender in commercial mortgages to make sure whether the property will be able to pay for itself.

Fraud –

This is when either the company is fake or it is encouraging its customers to do something illegal.

The mortgaging of the property process can be summarized as-

The borrower mortgages his property and receives loans from the lender. They take back the principal amount in addition with the rate of interest for certain fixed period of time till the loan is completely paid off. If the borrower fails to pay the installments of the loan then the lender owes the right to take possession of the property as a compensation of loan and this is known as foreclosure of the property.