Vol 6 No. 45 -August 2, 2006

Mortgages — just the facts, ma’am

By Louise Bolger

This may not be your typical summer beach reading, so if you want to skip this column, I certainly understand. In fact, I may be on my summer vacation by the time this is published, so I won’t even know. But if you harbor dreams of some day facing the competition on "Jeopardy," you might just pickup one or two pieces of obscure information if you keep reading.

A mortgage is a legal document by which the buyer transfers to the lender an interest in real estate to secure the repayment of a debt in the form of a mortgage note. In the mortgage note, the borrower promises to repay the debt, and the terms are set relative to the amount of the debt, the mortgage due date, the rate of interest, the amount of monthly payments, etc.

When the debt is repaid, the mortgage is discharged and a satisfaction of mortgage is recorded with the register or recorded of deeds in the county where the mortgage was recorded.

The party borrowing the money and giving the mortgage (the debtor) is the mortgagor; the party paying the money and receiving the mortgage (the lender) is the mortgagee. Under early English and U.S. law, the mortgage was treated as a complete transfer of title from the borrower to the lender. The lender was entitled not only to payments of interest on the debt but also to the rents and profits of the real estate. This meant that as far as the borrower was concerned, the real estate was of no value, therefore, it was "dead" until the debt was paid in full – hence the Norman-English name "mort" (dead), "gage" (pledge).

Before the Great Depression of the 1930s, most mortgages were straight or short-term mortgages requiring payments of interest and lump-sum principal. When borrowers couldn’t make their monthly payments they lost their properties. This risk is somewhat minimized today because of amortized mortgages where part of the payment applies first to interest and then to principal. In fact, until the 1930s only 40 percent of households owned their own homes; the rate today is nearly 70 percent.

Adjustable rate mortgages were started by lenders when the inflation of the 1970s made long-term, fixed-rate mortgages less attractive. The variable rate mortgage, graduated payment mortgage and adjustable rate mortgage all have rates of interest that vary or raise when rates go up. The initial interest rates are lower than for fixed rate mortgages

Failure to make mortgage loan payments results in foreclosure of the borrower’s rights in the real estate. The property is then sold by the county at a public foreclosure sale. At the foreclosure sale, the lender is the most frequent purchaser of the property.

Something that I found really interesting was to look back and see what the average 30-year fixed-rate mortgages were during the past 30 years. In 1976 the annual average was 8.87 percent. By 1986 it had jumped to 10.19 percent and in 1996 it was down to 7.81 percent. Of course these numbers pale by comparison to 1981 at 16.63 percent and 1980 at 13.74 percent.

The average for 2005 was down to 5.87 percent. Today’s average rate is 6.63 percent for a 30-year fixed and 6.25 percent for a 15-year fixed.

If you’re still awake, remember that owning your own property is probably the best investment the average person can make in his/her lifetime. It provides a home for your family, may help fund your retirement and it’s the only debt the federal government sill subsidizes. Enjoy the beach.

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