We define mortgage as a contract in which a property is established as collateral for the payment of an obligation. The debtor provides as security for the repayment of the debt a property, generally real estate. In the event of non-payment, the creditor may foreclose the mortgage, that is, request a public auction of the property to collect the debt.
The debtor does not have to deliver the property as security and can continue to enjoy it, only in case of non-payment the creditor can promote its sale.
Mortgages are very frequently used to obtain financing to acquire a home.
Mortgages have three fundamental elements:
- Capital: It is the borrowed money that must be returned throughout the life of the loan and that should be less than the price of the mortgaged property.
- Interest: It is the extra amount paid by the debtor to the creditor.
- Term: Time in which the loan must be repaid.
We can classify mortgages according to different criteria:
- According to the interest rate
- Fixed-rate mortgage: One in which the interest rate does not vary throughout the agreed mortgage term. In this case the installments are constant (the amount does not vary) throughout the life of the loan.
- Variable rate mortgages: The amount of the installments varies according to the mortgage reference rate periodically, normally every year.
- Mixed-rate mortgages. These are mortgages that combine a fixed rate with a variable rate. One percentage of the interest would vary according to a reference rate and the other is a fixed interest rate.
- According to the installment
The amount of the installment is recalculated each period (usually annually) based on the evolution of a referential plus the differential agreed in the contract. In each of the periods the amount of the installment remains constant until the next review. French amortization system, in which the monthly installment is made up of two parts: the interest and part of the capital pending repayment.
- Armored installment: This occurs in variable-rate mortgages in which the installment remains constant throughout the mortgage and it is the term that varies. The term increases when interest rates rise and decreases otherwise.
- Final installment: In this case, a significant percentage of the debt (approximately 30%) is paid in the last installment.
- Interest only: The installmentsonly cover the interest on the loan. At the end of its term the owner must repay the total amount of money he requested or he can sell the property before the end of that term.
- Increasing installment: The installment grows a fixed percentage each period (year), in addition to the variation of the variable rate of each revision.