Overview of Mortgages

• A mortgage is the transfer of property from a property owner to a lender in exchange for a loan. Technically, a mortgage is not debt but rather an interest in property that is used to secure debt. A lender will loan money to a borrower with the understanding that the interest in the property will revert to the borrower when the terms of the mortgage have been satisfied (that is, when the loan has been paid back in full). While mortgages are generally associated with securing real estate loans, they can be used to secure loans for other property as well, including ships, industrial equipment and other fixed assets. In exchange for receiving a loan, a borrower pays the lender interest. The interest rate the borrower pays is measured by the annual percentage rate (APR), which represents the annualized interest rate the borrower pays on his or her loan.
  
  

Mortgage Payments

• Mortgage payments are generally made each month; in some cases, they are made quarterly or annually. Each mortgage payment pays off both principal and interest. Early on in a mortgage, a majority of the payment will be used to pay interest, and only a small amount will be used to pay down principal. In later periods, after a portion of the principal has been paid down, the interest component of the mortgage payment will be smaller and the principal will be paid down more rapidly. You can easily calculate a mortgage payment using Excel. For example, to calculate the payment on a $200,000 mortgage with a 6 percent APR, a 30-year life and monthly payments, enter the following formula: =PMT(6%/12,360,$200000) where 6% / 12 represents the monthly interest rate on the loan, 360 represents the total number of payments to be made over the 30-year period and $200000 represents the initial balance on the loan. Excel calculates the monthly payment to be $1,199.10. Depending on the terms of the loan, this payment may stay fixed over the life of the loan or it may fluctuate from month to month.
  
  

Forbearance

• If a borrower is unable to pay off his or her loan, the lender may initiate foreclosure proceedings, which allow the lender to seize the borrower's property. Forbearance is a special agreement between a lender and a borrower that delays foreclosure proceedings. If a borrower has temporary financial problems, the lender may agree to delay foreclosure proceedings if he believes that the borrower will eventually be able to catch up on the payments due. To obtain forbearance, the borrower and lender must mutually agree upon a new payment schedule that will lower or suspend the current mortgage payment and allow a borrower to catch up on his payments over a certain period of time. Note that forbearance only works if a borrower is having temporary financial problems and is generally not a solution for more permanent financial difficulties.