By Ismael D. Tabije
A mortgage is a method of using property (real or personal) as security for the payment of a debt. It is an arrangement whereby a lender (the mortgagee) dispenses money to a borrower (the mortgagor), having the mortgagor's assets as collateral. Mortgages have played a significant role in allowing the spread of home ownership.
However, mortgages are not limited to loans used to buy homes or land. Mortgages of movable personal properties are possible, but the intricacy of the relevant law has meant that such mortgages are uncommon. A mortgage is unlike a hire-purchase agreement in that the mortgaged property belongs to the borrower. The mortgage becomes obsolete when the loan is fully repaid along with all the interest due.
In the past, a mortgage was a conveyance of land that, on its face, was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were not met --- usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage," Law French for "dead pledge." The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock, for repayment.
The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it, or refuse to reconvey it to the borrower, who was in a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as the equity of redemption.
This arrangement, whereby the mortgagee (the lender) was on theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly artificial. By statute the common law position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale and the right to take possession would be protected.
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.
There are essentially two types of legal mortgage. In a mortgage by demise, the creditor becomes the owner of the mortgaged property until the loan is repaid in full (known as "redemption"). This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption. In a mortgage by legal charge, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.
Each legal system tends to share certain concepts but vary in the terminology and jargon they use. Regardless, the law should be non-biased and both party's (mortgagor and mortgagee) insurance should be considered. They should be well informed of their rights and of the provisions embodying regulations on mortgage.
Copyright 2007 Ismael D. Tabije
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