A mortgage is the guarantee of the payment of a debt in the form of a property. The term is usually used to refer to the type of financing that uses a property as collateral.
The mortgage is the primary type of real estate financing practiced in some countries. The financed property itself serves as collateral for the credit granted by the bank for its acquisition. When one talks about real estate financing in some countries, it is almost sure that it is a mortgage. However, this expression hardly ever appears in the advertisements of the financial institutions.
Those who already own a property in their name can also mortgage it to obtain loans for other purposes, such as opening a business or finance their studies.
Advantages and disadvantages of a mortgage
The advantage of a mortgage loan is that it is possible to obtain higher amounts, with longer terms and lower interest rates than other types of credit.
However, in case of default, the borrower will lose the property offered as collateral, which is the mortgage’s main risk. Since the property was given as a guarantee voluntarily by the borrower, it can be taken away even if it is the family’s only property.
How does the mortgage work?
In this type of credit, the mortgaged property remains in the name of the borrower, but a contract is signed that guarantees the lender’s right to it in case of default. The registration of the mortgage is done in the property registry, so that it is public.
While paying off his mortgage, the borrower will be able to enjoy his property normally. This is where the mortgage differs from the mechanism used in the pledge. In the pledge, the guarantee is handed over to the creditor while the debt is not paid off. Since it requires this physical transfer of the guarantee, the pledge is only applicable in the case of movable assets (jewelry, vehicles, or machinery, for example), unlike the mortgage.
A mortgage is an indivisible right, i.e., the mortgaged property will continue in its entirety as a guarantee until the debt is fully paid off. This means that the debtor will lose the entire property if he or she does not pay the debt, even if most of it has already been spent and the outstanding balance is well below the value of the property.
Another feature of the mortgage is that the creditor can enforce it even if the property no longer belongs to the debtor. This is possible because the legislation does not prevent a mortgaged property from being sold to another person. The buyer of a mortgaged property can lose it if the former owner defaults.
It is the Civil Code that establishes the mortgage rules.
Types of mortgages
This is the most common type of mortgage, which is entered into by mutual agreement between creditor and debtor. It encompasses commercial financing agreements that use real estate property as collateral.
Little used in practice, the legal mortgage is an instrument for legislation that aims to prevent or compensate for possible losses. It does not depend on the debtor’s endorsement, being foreseen by law for some situations. An example of this is the right given to children over the property of the father or mother who remarries before taking inventory of the previous marriage.
The courts determined this type of mortgage is determined by the courts, which may mortgage a defendant’s property in favor of the other party to the lawsuit to guarantee compliance with the final judgment.
Mortgages and the crisis in the United States
Mortgages are a common type of loan in the United States. The classic mortgage model used in the country established a fixed interest rate, which was valid for the entire period of the loan.
In the first decade of the 2000s, American banks began to focus on granting mortgages to clients without a history of paying well, using a post-fixed interest rate.
The so-called subprime crisis that erupted in 2007 in the United States had its origin in the rampant increase in subprime mortgages.
The rise in interest rates in the US economy meant that many of these borrowers could no longer afford to pay their debts. At the same time, falling home prices reduced the value of the collateral that had been pledged to the loans. This led to a crisis in the American financial system, which eventually spread to the entire world.