A mortgage is a loan asset of a lending institution and the credit market. In the case of a mortgage, the lender – the grantor – contracts with a homebuyer – the grantee – to finance the buyer's purchase of a residence or commercial building.
A mortgage document assigns specific duties, responsibilities, benefits and limitations to both the grantee and grantor, who are also referred to as mortgagor and mortgagee.
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By granting the loan, the mortgagee acquires a priority legal interest in a property's value. In turn, the mortgagor assumes a liability in the amount of the mortgage, or home loan.
The Function of a Mortgage
By granting a home loan, a mortgagee assumes a risk. To limit that risk, the lending institution establishes a priority legal interest in the dollar value of the property that's named in the mortgage. A perfected lien and title ownership are the documents that formally create the lender's interest in a home or another piece of real estate.
The Mortgage Grantor Role
A mortgagee, or grantor, finances the purchase of real estate, such as a residence or commercial building. By establishing a legal interest in the mortgaged real estate, the lending institution, or mortgagee, counters the risk that the grantee will default on the home loan and the institution will not be repaid.
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In most cases, a mortgagor will pay installment payments to the mortgagee that are dictated by a mortgage amortization schedule. Consequently, assuming the borrower adheres to that schedule, the mortgagee will receive a monthly cash flow from the borrower throughout the loan's term or until the borrower pays the loan in full.
The Role of Mortgage Grantee
In a mortgage, the borrower assumes the role of the mortgagor, or grantee. A grantee takes out a mortgage to finance the purchase of real estate, such as a residence or commercial building. She also takes title to the mortgaged property.
Grantor Lending Products
A mortgage is a loan that's secured by real estate. When a borrower – the grantee – receives a mortgage loan, the lender – the grantor – takes a lien against the mortgaged property as security in the event the grantee defaults on the loan. While the fixed-rate loan is the most common type of mortgage, lenders offer variable interest rate mortgages as well.
Fixed-Rate Mortgage
The fixed-rate mortgage is an installment loan in which the homebuyer pays the same rate of interest on the loan's outstanding balance throughout the loan's term. The payment amount also will remain the same from one month to the next, but the proportion of each payment that goes toward paying off the principal and paying the loan's interest will vary.
Variable Interest Rate Mortgage
In contrast, a variable interest rate – an "adjustable" or a "floating" rate – is an interest rate on a loan or security that fluctuates over time because its basis is a benchmark interest rate or index that changes over time.
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Non-Amortizing Mortgage
Another alternative is the non-amortizing loan whereby the borrower pays one lump sum payment at an agreed time in the future. These loans pose a greater risk to the lending company than the fixed-rate installment loans in terms of possible loan default. One reason being is that the probability that a grantee will have a large amount of cash on hand at one point in time is less likely than the borrower having a smaller amount of cash available from month to month.
The grantor issues non-amortizing loans with either a fixed or variable rate. During any non-amortizing loan's term, interest payments based on the loan's principal may and may not be required. For instance, a non-amortizing loan may require the borrower to pay one balloon payment, or the lender might require monthly interest payments from the borrower.
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