MORTGAGES IN THE UNITED STATES

Mortgages in the United States

Types of Mortgage Instruments

Two types of mortgage instruments are used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.

The mortgage

In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.

The deed of trust

The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding.

Most "mortgages" in California are actually deeds of trust. The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of 3 months rather than a year.

Deeds of trust to secure repayments of debts should not be confused with deeds to trustees to create trusts for other purposes, such as estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.

LEGAL ASPECTS

Legal Aspects
There are essentially two types of legal mortgage

Mortgage by demise

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.

This is an older form of legal mortgage and is less common than a mortgage by legal charge. It is no longer available in the UK, by virtue of the Land Registration Act 2002.

Mortgage by legal charge

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.

To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.

This type of mortgage is common in the United States and, since 1925, it has been the usual form of mortgage in England and Wales

OTHER MORTGAGES TERMINOLOGIES

Other Mortgagses Terminologies:

Advice
A recommendation about the most suitable mortgage for you made by an adviser who is regulated by the FSA.

Annual statement
A statement from your mortgage lender, sent every year, showing among other things what you've paid and what you still owe.

Approval in principle
A certificate which some lenders will give you that shows the amount they will probably be prepared to lend you. This is not a guarantee, but can be helpful when signing up with estate agents.

APR
Annual Percentage Rate. This shows the overall cost of a loan, taking into account the term, interest rate and other costs.

Authorised firm
A firm that has permission from the FSA to carry out regulated activities.

Capital
The amount you borrow to help buy your home.

Capped mortgage
A mortgage that has a maximum limit on the interest rate you'll have to pay during a special deal period.

Cashback mortgage
A mortgage that comes with a cash sum (often a percentage of the amount you're borrowing).

Compare products (mortgage tables)
Use our impartial tables to compare mortgages from a wide range of lenders.

Collared mortgage
A mortgage with a minimum interest rate you'll pay during a deal period.

Deposit
The amount of money that you're putting into buying a home (not including the mortgage money you're borrowing).

Discounted mortgage
This has a discounted variable rate of interest for a set period, after which the rate will increase.

Early repayment charge
A charge you may have to pay if you break off a mortgage deal - by paying it back early and/or moving to another lender.

Fixed rate
An interest rate that is fixed (ie it doesn't move up or down) for a set period of time.

FSA
The Financial Services Authority - the UK's financial watchdog.

Income multiples
The factor by which your earnings are multiplied to find out how much you can borrow.

Interest
The charge made by lenders when you borrow their money.

Interest rate
The figure that determines how much interest you pay. Usually linked to the Bank of England's rates and can move up or down.

Interest-only mortgage
A mortgage where you only pay the interest charges of the loan each month. This means you are not reducing the loan amount (or capital) itself, and this will need to be repaid in some other way.

Key facts documents
Standard documents that all authorised lenders and brokers must give you to explain their services and details about the mortgage you're interested in.

Loan-to-value
The percentage of money you want to borrow compared to the cost of the property.

Mortgage
A loan which is secured against your property.

Mortgage broker
A mortgage broker helps you understand the various mortgage types and deals available to them. A mortgage broker may recommend a mortgage for you or they may provide you with information to enable you to make your own choice.

Register
A list of firms that are regulated by us to carry out financial services in the UK. You can check online to see whether a firm is regulated by us, see Check our Register.

Remortgaging
The process of changing your mortgage for a different one, without moving home.

Repayment mortgage
A mortgage that pays off both the home loan and the interest at the same time. Make all the payments and the mortgage will be fully repaid.

Stamp duty
A tax which home buyers must pay on properties above a government set figure.

Standard variable rate mortgage
A loan at the lender's normal mortgage rate - ie without any discounts or deals.

Secured
A mortgage is a secured loan on your home; this means that if you fail to repay it, your lender may be able to sell your home to get its money back.

Survey
A report on the condition of the property you are planning to buy.

Tracker mortgage
A mortgage with an interest rate that is usually linked to a particular rate that is set independently from the lender and moves up or down with it.

Term
The length of your mortgage.

Valuation
A brief inspection, for the benefit of your lender, of the home you hope to buy. This is to make sure they are not lending more than the property is worth and that the property is suitable security for the mortgage, but this will not tell you if it is a good or bad buy. For your own peace of mind, you may want your own survey.

COMPARE PRODUCTS

Compare products

Use our impartial tables to compare similar financial products from different companies. There are tables for:

• Pension annuities
• Mortgages
• Savings accounts
• Stakeholder and personal pensions
• Unit trust and OEIC ISAs
• Investment bonds
• Savings endowments

All you need to do is answer a few questions so we can tailor the results to your circumstances. You'll get a table of products which will help you to find what you're looking for.

INTEREST ONLY MORTGAGES

Interest-only mortgages

As the name suggests, your monthly payment only pays the interest charges on your loan - you're not actually reducing the loan itself. This is why it's very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan.

If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up. See How to make up a shortfall, in Publications.

The pros: Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower.

The cons: That debt is not going to go away. Throughout the life of the mortgage, you'll need to check your investment or savings plan is on track to repay your loan at the end of the term. If you can't repay it at the end of the term you could lose your home.

So, choosing a repayment or interest-only mortgage is one decision. The other will be to choose the interest-rate deal. In our Types of interest rate deals section we explain the main types of deals available and in Mortgage features we highlight a few things to watch out for.

REPAYMENT MORTGAGES

Repayment mortgages

Every month, your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you're paying off a small part of your mortgage.

The pros: It's a simple, clear approach - you can see your loan getting smaller.

The cons: In the early years your payments will be mainly interest, so if you want to repay the mortgage or move house in the early years, you'll find that the amount you owe won't have gone down by very much.

TYPES OF MORTGAGES

Types of mortgage

You can choose to pay your mortgage back in the following ways:

• Repayment mortgages;
• interest-only mortgages; or
• a combination of the two.

You'll need to decide which is best for you.

HOW MORTGAGES WORK

How mortgages work

• You take out a loan based on how much you can afford and the value of the property, for a length of time agreed between you and the lender.
• You are charged interest on the loan, usually based on the Bank of England base rate which is reviewed monthly.
• You pay the mortgage back in one of two ways, repayment or interest-only– see Types of mortgage.
• You can choose different deals for your interest rate, such as fixed or discounted – see Types of interest rate deals.

CHOOSE A MORTGAGE

Choosing a mortgage - where to start

You can get a mortgage direct from the lender (banks, building societies and specialist mortgage lenders), or you can use a mortgage broker. You can buy based on 'information' only or get advice and recommendation on a mortgage that suits your particular needs.

MORTGAGES

INTRODUCTION:

A mortgage is a loan you take out to buy property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. If you change lenders but don't move home it's referred to as a 'remortgage'.

A mortgage is a method of using property (real or personal) as security for the payment of a debt.

The term mortgage (from Law French, lit. death vow) refers to the legal device used in securing the property, but it is also commonly used to refer to the debt secured by the mortgage, the mortgage loan.

In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) 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. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property.

In many countries it is normal for home purchases to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Spain, the United Kingdom and the United States.