In the real estate, financing has become the most complex element of transactions in both residential and commercial markets. Mortgaging and other financing options drive a multi-billion dollar industry allowing a majority of the home owners to purchase property only a fraction of the price of the property they wish to purchase . Due to the increasing influence of the federal government on the real estate market and the truth that mortgages are a form of investment made the forms required to develop a typical real estate market uniform. Mortgage refers to the art of connoting an instrument signed by the mortgagor and the mortgagee that secures a debt evidenced by a promissory note between the two parties. While the borrower is the mortgagor, the lender is the mortgagee.
All mortgages must have a note, which refers to a legally enforceable instrument to pay a sum of money in the future. A note requires only the borrower’s signature. A co-signer is personally liable for repaying the debts. A mortgage must contain the legal names of the borrower, lender and the signature of the borrower. It must include the property’s legal description and convey a security interest in that property. The mortgage must reference the promissory note. The acceleration clause of the mortgage allows the lender to call due the remaining loan balance if the borrower defaults . A prepayment clause of the mortgage allows the borrower specific permissions to pay the debt ahead of the schedule. The title theory transfers the property to the lender or a third party trustee until the repayment of the loan of the mortgage.
On the other hand, a note is an instrument signed by the mortgagor identifying the borrower, the lender, the indebtedness and the terms of payment . The note indicates the mortgagor’s promise to pay the debt back to the mortgagee. In other words, it is a negotiable instrument pursuant to all the rules and regulations of the Uniform Commercial Code (UCC) and subject to all the UCC rules and regulations regarding the transferability of the mortgage. The mortgage when compared to a note is a lengthy and complex document that defines the rights and responsibilities of the parties with respect to the real estate property. It curtails the use of the property by the mortgagor or the owner to acts intended to protect or insure the value of the property as a security interest for the mortgage . It also creates certain valuable rights to reach and dispose the secured property should the mortgagor default on his obligations pursuant to the note. A mortgage involves two distinct terms, namely the note and the mortgage.
Though the note and mortgage go hand in hand, they have several distinguishable features as the rights and remedies provided by each of them are different and at times contradictory. In other words, a mortgage cannot exist without a note to secure. The body of commercial law is responsible to facilitate the transferability of notes evidencing debts represented by the notes. The variance between the UCC and the real property law is the root cause for several conflicts that need optimum resolutions. A traditional mortgage is a level monthly payment debt that fully amortizes the mortgage over a period of time pursuant to which the mortgagor, the vendee purchasing the house and making monthly payments pays the same amount each month to the mortgagee, the bank lending the funds .
A portion of the amount paid by the mortgagor pays the interest that accrues on the outstanding debt since the previous payment, while the rest of the monthly payment pays down the principal amount of the loan or indebtedness. Typically, after a period of 20 or 30 years, the mortgagor pays off the indebtedness by making the last payment and owns the property free and clear of the mortgage. Since the mortgagor owes a large amount while making the first payment, a significant portion of the payment attributes towards the payment of the interest and a small amount applies towards the principal amount of the loan . The points charged by the mortgagee in executing the mortgage are important in calculating the actual rate of interest. A point is one percent of the face value of the loan. Points paid to the mortgagee upon the execution and funding of the mortgage allow the mortgagee to raise the effective or the actual yield on the executed mortgage. In other words, points represent a one-time transfer of money from the mortgagor to the mortgagee by which the mortgagee profits in excess of the stated rate of interest paid by a percentage of the loan at the initiation of the loan during the funding of the loan .
Underlying the mortgagor’s desire to maximize the monthly mortgage payment for which she qualifies in the eyes of the institutional lenders is the tax deductibility of the interest paid on the mortgages and other financing devices used to purchase both primary and secondary residence with deductable interest not exceeding $1,000,000 . The federal government subsidizes the mortgagor’s purchase of the home through the transfer of income known as deduction. In addition to providing that the gross income of the mortgagor supports the monthly payments, a successful mortgage applicant must show that the property securing the mortgage is worth at least the amount of money borrowed. The banks and other commercial lenders recognize the worth of the property is some amount in excess to the amount borrowed to protect their investment in the property .
In the event of default, the property serves as a sale to satisfy the debt. There is a strong relationship between the loan-to-value ratio and the rate of foreclosure. The higher the mortgagor’s equity in the premises, the greater the incentive to protect the investment as the mortgagor needs to maintain the residence and pay the taxes . For every incremental decrease in the value of the property, the mortgagor will lose a fraction of the equity in the premises. Conversely, if the mortgagor has no equity in the property and the value of the property declines to the point that it is worth less than the mortgage, the mortgagor has a strong incentive to default on the mortgage. In such a scenario, all the risk and the resulting loss fall on the mortgagee. It generally prevails if the state prohibits deficiency judgments or the mortgagor places no monetary value on the harm done to the property as a result of default. Historically, a mortgage is a dead pledge, in which the lender takes possession of the land and uses the profits for personal gain in order to reduce the indebtedness . Some jurisdictions entitle the lenders to the possession and the rents or profits generated by the land until the pay off of the debts.
References
America, M. B. (2002). Principles of Commercial Real Estate: Mortgage Servicing. Dearborn Real Estate.
Jacobus, C. J. (2009). Real Estate Principles. Granite Hill Publishers.
Jr., A. M. (2012). Understanding Modern Real Estate Transactions. LexisNexis.
Sirota, D. (2003). Essentials of Real Estate Finance. Dearborn Real Estate.
