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Mortgage: How does it work?

What is a mortgage?

A mortgage is a type of financial guarantee that is given to a lender, usually a bank or other financial institution when a person or business borrows money to buy property. The mortgage is placed on the property, usually a house or other real estate, and is used as security for repaying the loan.

When a person or business takes out a mortgage loan, they usually sign a mortgage contract, in which they agree to pay the loan back, with interest, in monthly instalments. If they fail to pay the instalments, the lender has the right to start foreclosure proceedings, which means they can sell the property to recover the money that was borrowed.

What types of mortgages exist?

There are two types of mortgages: first and second mortgages.

The first mortgage has priority over other mortgages on the property, which means that in case of a foreclosure, the creditor first has the right to recover the money borrowed before other creditors.

The second mortgage has lower priority, and can only be paid after the first mortgages have been discharged.

Besides, there are also fixed mortgages and adjustable mortgages. In a fixed mortgage, the amount of the instalments are fixed at the time the loan is taken out and does not change over time. In adjustable-rate mortgages, the amount of the instalments may change over time, usually according to the market interest rate.

In addition, there are some important terms that are commonly used in relation to mortgages:

Balance due: is the total amount still to be paid on the mortgage.
Interest rate: this is the rate applied to the balance debtor, which determines the value of the instalments to be paid.
Term: the period of time during which the loan must be paid.
Amortization: is the process of paying off the loan, where the outstanding balance is reduced over time.
Deed: is the legal document that registers the mortgage and transfers the property to the lender as security for the loan.

To obtain a mortgage loan, it is usually necessary to meet a number of requirements, such as proof of income, credit history, and an initial deposit. It is also common for an appraisal of the property to be carried out, to determine its value.

Once the loan is granted and the instalments are paid, the borrower has the right to continue living in and enjoying the property until the loan is paid in full or until a default occurs, which can lead to foreclosure.

In summary, a mortgage is a financial instrument that allows the acquisition of a property through a loan, secured by such property, and which can be enforced by the creditor in the event of default.

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